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Don’t Forget the Saver’s Credit on Your Tax Return

saver's credit

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Did you realize that there is a saver’s credit available to you for your contributions to retirement plans?  There are income limits, but if you fit the limits, this type of credit can be exactly what you need to get you started on your retirement savings activities.

Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2018 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $4,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2018 tax return.  People have until April 15, 2019, to set up a new individual retirement arrangement or add money to an existing IRA for 2018. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees.  Employees who are unable to set aside money for this year may want to schedule their 2019 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

  • Married couples filing jointly with incomes up to $63,000 in 2018 or $64,000 in 2019;
  • Heads of Household with incomes up to $47,250 in 2018 or $48,000 in 2019; and
  • Married individuals filing separately and singles with incomes up to $31,500 in 2018 or $32,000 in 2019.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed.  Though the maximum saver’s credit is $2,000, $4,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.  Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement.  For example, most workers may deduct their contributions to a traditional IRA.  Though Roth IRA contributions are not deductible, qualifying withdrawals, usually after retirement, are tax-free.  Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the savers credit include the following:

  • Eligible taxpayers must be at least 18 years of age.
  • Anyone claimed as a dependent on someone else’s return cannot take the credit.
  • A student cannot take the credit.  A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit.  For 2018, this rule applies to distributions received after 2017 and before the due date, including extensions, of the 2018 return.  Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006.  To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation.  More information about the credit is on

Thoughts on FIRE

As a financial planner it’s common to come across articles, blogs, and other material advocating individuals, especially those that are young to embrace FIRE. The acronym FIRE stands for Financial Independence Retire Early.

Essentially what this movement advocates is for individuals to save as much as they can, in order to retire early, preferably while young, and no longer be dependent on wages.

At first glance, this appears to be a great concept to embrace. After all, there are many individuals who would like to retire early and not have to worry about where the next paycheck is coming from.

However, the FIRE lifestyle is not a strategy to be taken lightly. Additionally, be wary of those selling the idea of FIRE, without having skin in the game.

Let me explain.

First, to retire early, and be financially independent requires an enormous amount of discipline and an extreme amount of frugality. The general recommendation for folks saving for retirement is 15-25% of gross income to an IRA or 401k. Those looking to FIRE, should aim for 50-75% of gross income.

Why so much?

Think of it this way. If someone retires early at age 30, and expects to live another 50 years, that’s 50 years of living off portfolio income! Keep in mind this portfolio income is still subject to volatility – so even in down years, withdrawals must be made.

So, an individual looking for FIRE, must be frugal while saving, but also while in retirement. There’s a lot of sacrificing to be done. This isn’t necessarily bad but should be considered.

Some articles report that FIRE individuals retired on $1 million, expecting to live off 4% annually, or $40,000. Personally, I think this is way too low. What if their investments decline? Is the 4% guaranteed? What about unforeseen expenses such as health care, education, etc.?

Additionally, people who FIRE, can expect their Social Security income to be small.

Second, play devil’s advocate with those selling the FIRE philosophy. I’ve read several articles and blogs from self-proclaimed FIRE folks that say they “retired early and so can you.” But after further inspection, they aren’t truly retired. They either have a spouse that still works, or they continue to earn income through their blog, side jobs, etc.

Again, none of this is bad, but is it really retirement or simply working from home? Could they maintain their FIRE lifestyle if they quit blogging, or working from home? This I question.

Finally, there’s nothing wrong with working. Many individuals receive great satisfaction from their job – giving a sense of purpose, pride, and contribution. Many individuals would could retire, choose to continue working for other reasons – money aside. They have a sense of purpose, and many love what they do. Why would they retire?

Personally, I have nothing wrong with FIRE. I think it’s a lifestyle choice that can work for many individuals. For individuals considering embracing the FIRE philosophy, it will be important to do their due diligence, prepare for extreme frugality, and save more than they expected. It’s not something to play around with; after all, we all know what happens when we play with fire…

Medicare and Social Security Ages Decoupled

hands by mijitaBack in the olden days, when 65 was the age to apply for full Social Security retirement benefits, Medicare and Social Security seemingly went hand-in-hand.  At the same time that you applied for Social Security retirement benefits, you would also apply for Medicare – all at age 65. With changes to Social Security, these two programs have become decoupled. (Of course you always have had a choice of filing for SS earlier or later, but most folks went at 65 nonetheless.)

In the continuous evolution of the Social Security system, as we all know, the age for full retirement benefits has increased – up to age 67 for some folks now. Plus you have the option of applying early for your retirement benefit, as early as age 62. While all this has been going on, Medicare… didn’t change.  For most folks, access to Medicare begins at age 65, which is now decoupled from the ages for Social Security benefits. If you’re actively collecting Social Security benefits at age 65 (or you just signed up for Social Security at 65), Medicare comes automatically, and the premium is deducted from your SS check. But if you’re not on Social Security, you have to file for Medicare on your own. And pay for it separately as well, since you don’t have a Social Security check for it to be deducted from.

So, with this decoupling, it is important to keep Medicare in mind as you reach age 65 – because applying late will cause a possible 10% penalty per 12-month period that you delay applying.  This penalty will continue for the rest of your life. You can enroll in Medicare as early as 3 months before your 65th birthday – and it makes a lot of sense to get started early, because the process can take quite a while to complete, depending upon your circumstances.

How Social Security COLA is Calculated

200px-Double ColaAs you are probably aware, each year your Social Security benefits can be increased by a factor that helps to keep up with the rate of inflation – so that your benefit’s purchasing power doesn’t decrease over time.  These are called Cost Of Living Adjustments, COLAs for short.  The increase for 2018 was 2.0% – and for 2019 the COLA is 2.8%.  But how are those adjustments to your benefits calculated?

Calculating the COLA

There is an index, compiled and managed by the Bureau of Labor Statistics, called the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  This index, or rather changes to the index, gauges the fluctuations in selected wages over time.  Each October, SSA looks at the CPI-W level for the third quarter of that year (averaging July, August and September), and compares it to the same level for the previous year’s third quarter.  The percentage of increase, if any, is then used as COLA for Social Security benefits.  This is an automatic process, no action is required by Congress to enact the increases over time. Also, being automatic, without passage of a law Congress can’t bypass an increase when the numbers warrant.

As an example, the CPI-W average for the third quarter of 2018 was 246.352, and for the same period in 2017 the average was 239.668. Comparing the two amounts we see that the CPI-W has increased by 6.684. Dividing this number by the 2017 average, we see that the increase year-over-year has been 2.788%, which is rounded to 2.8% for the COLA increase for 2019.

How it’s applied

So, simple enough, right?  We have the COLA, just multiply that by your benefit, right?  Not so fast there, calculator-breath.  Staying true to form, SSA has a more complicated method to determine what your benefit will be each year.

As we mentioned before in the article on Calculating the Social Security Retirement Benefit, when you apply for benefits affects your benefit permanently.  All benefit calculations begin with your Primary Insurance Amount (PIA), and are adjusted up or down depending on whether you apply for benefits after or before Full Retirement Age (FRA), correspondingly.

For example, if your Full Retirement Age is 66 and your PIA is $2,000, but you’ve filed for benefits early at age 62, your actual benefit amount began at 75% of the PIA, or $1,500.  The COLA is applied to your PIA, and then your reduction applied to that amount.  So for a COLA of 2.8%, your new benefit amount would be $1,542 – calculated as PIA ($2,000) times COLA (2.8%) equals $2,056, times the reduction amount of 75%, for a total of $1,542.

The math works the same either way, you could just simply multiply your current benefit amount by 2.8% to come up with the increase. I just walked through it this way because that’s how Social Security calculates it. Sorry about the calculator-breath comment earlier, it was unwarranted. 

Similarly, if you delayed your benefit to age 70, your benefit would begin at 132% of your PIA, or $2,640.  For the 2019 increase of 2.8%, your new benefit would be $2,713.90.  Amounts are always rounded down to the next lower dime.

Don’t Invent Income!

invent incomeSeems like a no-brainer – why would anyone want to invent income? That just means you’ll have to pay tax, right? Not always, especially if the income is for a minor and is only a relatively small amount – say, enough to qualify for the maximum Roth IRA contribution, for example.

This is a follow-up to the article Open a Roth IRA for Your Child, where we talked about how beneficial it can be to set up one of these accounts for your child. One of the points we talked about in that article was how the account can only be funded with of the lesser of $5,500 (for 2018) or total taxable compensation. It’s very important to know what exactly can be considered “taxable compensation” for this purpose. Because the rule is, that if you don’t have taxable compensation, you can’t make a contribution to a Roth IRA.

Taxable Compensation

Of course, any wages reported in Box 1 of a W-2 form from the employer is considered taxable compensation. In addition, any tips, professional fees, or other amounts you receive for providing personal services are compensation as well. If your scholarship or grant is included in Box 1 of a form W-2, this is also considered taxable compensation. Commissions, self-employment income, alimony, military differential and non-taxable combat pay (even if it’s non-taxed!) are also included in determining the total amount of taxable compensation for the purpose of determining IRA contribution limits.

But most of these sources of income are not common for children, especially younger children – unless they happen to make money as a model, actor, or other sort of entertainer. Usually for younger children the paper routes, lawn mowing, and babysitting jobs are just a bit beyond their reach. So, sometimes well-intentioned parents get the idea to invent income in order to qualify to make a contribution to a Roth IRA for the child.

Taxable compensation doesn’t mean that whoever earned it must pay tax. It does mean that the compensation is counted as taxable on a tax return – but if the income is less than the threshold for taxation, there would be no tax on that income. For 2018, earned income less than $12,000 can be completely tax-free, since the standard deduction is $12,000. If there is legitimate earned income, this can be an excellent time to contribute to a Roth IRA – this money will forever be tax-free!

Don’t Invent Income

In general, if an activity isn’t something that you would normally have to pay someone to do (like feeding the dog, making the bed, doing the dishes, etc.) then it’s probably not taxable compensation you’ve paid the child. If the child is doing an activity (mowing the lawn, for instance) for your neighbor for a reasonable compensation then that’s a different story – just use your head and make sure that it’s really compensation and not an allowance. You’re doing this to help the child get started with a Roth IRA – not to establish a criminal record as a minor! And you might think that it’s not a big deal, but to invent income is tax fraud, and it can be very strictly enforced and penalized.

Social Security / Ponzi Comparison – is it fair?

not Charles Ponzi, actually his name is Pvobert PattersonTime after time, folks compare the Social Security system to a giant, government-sponsored Ponzi scheme. The argument is that current beneficiaries are paid by funds from new monies being added into the system. This is a broad description of how the typical Ponzi scheme works… but is this a fair comparison to Social Security? The other day I came across an article written by a fellow financial blogger, xrayvsn, who is a practicing radiologist. His blog can be found at, and he writes a lot of great stuff about the FIRE movement (Financial Independence / Retire Early), among other things. I think the blog is well-written and provides some really good information. You should give it a look!

So back to xrayvsn’s article, Is Uncle Sam Worse Than Bernie Madoff? This article takes us through a history lesson about Charles Ponzi’s legacy and how Bernie Madoff adapted it to his interests, and how both schemes ultimately failed with the proprietors subsequently jailed. With this backdrop, xrayvsn provides the reasoning behind his assertion that Social Security is, in fact, a giant Ponzi scheme. And I don’t disagree with what he says, up to a point.

Anatomy of a Ponzi scheme

The way a Ponzi scheme works is that the organizer (Ponzi, Madoff or others) gets the attention of investors, telling them of returns that can be had from their particular ploy. The returns advertised are generally above average, and are purported to be guaranteed or very low risk. Then as the first investors begin putting money into the system, the original investment activity does, in fact produce the expected better-than-average returns. Word of mouth causes more money to flow to the ploy. As the scheme develops and more and more money comes into the system, it becomes necessary to start paying out to the earlier investors with money that is taken in from new investors. This works just fine for a while, but at some point the scope of the ploy becomes too large to take advantage of the original arbitrage (in the case of Ponzi), or a systemic issue occurs which causes current investors to request liquidation (as in Madoff’s case).

In order for a Ponzi scheme to work, the inner workings of the “investment” are a closely-held secret – reason being that the organizer’s vast knowledge and inside tactics are what produces the returns, so publishing them would devalue the secrets immediately and it would all be over (and this is actually true, of course!). The other factor that has to be in place is that the newest, and in fact a high percentage of all current investors, are encouraged to continue to leave their investments on account – to continue earning the fabulous return.

At some point, a large number of investors ask for their money back. (Other ways a Ponzi scheme can come to an end include the organizer decides to take the money and run, or the inflow of new investors dries up.) Of course only a fraction of the “on paper” money is available to pay out, since the majority of new money has been paid out to the earlier adopters and others who, for whatever reason, requested a payout ahead of the herd. This is when the scheme is found out, the investors walk away with little or no money, and the organizer goes to jail.

Here are the main factors that must be in place for a Ponzi scheme:

  1. Central organizer
  2. Promise of better-than-average return
  3. Guaranteed return (or extremely low risk)
  4. “Secret” investment activity
  5. Continuous inflow of new investors
  6. Encouragement to not “cash out”

Comparison to Social Security

Taking the 6 factors listed above that describe a Ponzi scheme, how do these fit with Social Security? Let’s apply each one:

  1. Central organizer 
  2. Promise of better-than-average return 
  3. Guaranteed return (or extremely low risk)
  4. “Secret” investment activity 
  5. Continuous inflow of new investors
  6. Encouragement to not “cash out”

So there are two items on our list that do not match up, #2 and #4. There’s a third that doesn’t match up exactly (#6), as well.

Regarding #2 – the “return” on your Social Security tax withheld (and your employer’s contributions) is not purported to be better than average. In fact, according to SSA, your benefits are expected to replace only about 40% of your pre-retirement income, and the larger your income, the lower that replacement figure is!

However, rather than the enticement of a better-than-average return, Social Security has something even better – it’s against the law to not participate (okay, there are a few exceptions). So in a way, Social Security has dealt with one of the eventual problems of Ponzi schemes: when the inflow new investors dries up. If you’re a US citizen with earned income (unless from a governmental or other exempt employer), you are required by law to “participate”.

And with respect to #4, the Social Security benefit calculations are readily available, and they are determined based on readily known facts: your earnings over your lifetime, and your date of birth. The underlying investment of monies that are used to pay benefits over time are well known (US Treasury securities) (whether you believe this or not is a debate for another time).

#6 in the list is debatable – I marked it as “checked” because there are inducements to participants that result in reduction of benefits by filing early, but there’s really no “encouragement” to not file. Plus, you can’t actually “cash out” of Social Security.

So, although Social Security has some very similar characteristics to a Ponzi scheme, I don’t completely agree with this assertion, for the three factors listed above, plus what I refer to below as the real difference.

The real difference

The real difference between Social Security and a Ponzi scheme is that a Ponzi scheme is promoted as an investment, while Social Security is insurance.

An investment is defined by Investopedia as

An investment is an asset or item that is purchased with the hope that it will generate income or appreciate in the future.

So, when investing, we purchase something (like a mutual fund) and hope it will appreciate in value or produce an income stream for us in the form of dividends.

Insurance on the other hand (according to Investopedia) is defined as

Insurance is a contract (policy) in which an insurer indemnifies another against losses from specific contingencies and/or perils.

When we pay our homeowner’s insurance premiums, we actually hope we never have to file a claim. But we make these premium payments on the chance that our home might burn down, in which case we’d get a settlement to repair or replace the damaged property.

Social Security is actually a specific type of insurance, known as an annuity. Investopedia defines an annuity as

An annuity is a financial product that pays out a fixed stream of payments to an individual, primarily used as an income stream for retirees.

With an annuity, we pay premiums expecting to receive a stream of payments in return. What we’re protecting against with an annuity is the chance that we’ll live longer than our paid-in premiums would have lasted us if we’d just kept them and used them for living expenses. This is protection against living too long.

Lastly, the other factor about the insurance provided by Social Security is that it is social insurance. defines social insurance as

a system of compulsory contribution to provide government assistance in sickness, unemployment, etc.

We can take “etc.” to include retirement income benefits for our purposes in describing Social Security. Investing and most insurance is voluntary (to a degree), but social insurance is compulsory. It’s against the law to not participate (again, with a few exceptions).

So, while you might think about your Social Security tax payments as an investment (you may hope for income or appreciation), it’s actually an annuity (because it produces a stream of payments to you in exchange for your tax payments, and the stream of payments continues as long as you live). Social Security is a regressive taxation system (high income earners pay less SS tax as a percentage of total pay, because of the annual SS taxation cap) and a progressive benefit system (lower income beneficiaries receive a higher benefit in proportion to taxes paid in).

Insurance is (broadly) protection against economic loss or adverse event. Take auto insurance for example: You don’t expect a “return” from your auto insurance, in fact you hope to never have to use it. Using the auto insurance means that you’ve had some damage to your auto or damage to someone else’s property or person by your auto. However – if you only paid in one premium payment and then you total your brand new Maserati, you’ve had a pretty great return on the investment!

Annuities as insurance protect the participant against living longer than their assets can provide a stream of income. So the way to get a great “return” from your Social Security annuity is to live longer than the actuarially-determined average lifespan – of around 80-82 years. Live a lot longer than that and you might get a decent return on your investment. The lower your income was during your earning years, the better the return. But the key here is that the social aspect of this insurance and the progressive nature of the benefits guarantees that there will be many folks in middle to higher income strata that will receive a poor return (probably negative) on the overall activity.

The pyramid nature of Social Security

As also discussed in xrayvsn’s article, in order for the process to continue to pay out benefits, a problem arises when the number of new participants isn’t growing enough to continue paying the current and near-future beneficiaries. This situation is starting to come into focus as reported in the Social Security Trustees’ annual report. The 2018 Trustee’s report indicates that by 2033 the Social Security trust fund will be exhausted, and projected tax rolls at that time will only be enough to pay out approximately 75% of the promised benefits under current law, if nothing changes.

We’ve been here before, and this brief history lesson may tell something about the way this whole process works. Back in 1982, a similar report came from the Social Security trustees, indicating (as each annual report had previously for several years) that unless changes are made, beginning in 1983 there would have to be a reduction of benefits to current recipients. The rules in place had not substantially changed since the inception of Social Security in 1935, when the projection was that the system would remain solvent for at least 75 years.

It’s not surprising that a 75-year prediction only lasted 48 years. Look at all that happened in the intervening years: a world war, two more wars in Asia, man landed on the moon, the oil embargoes, and the list goes on. There’s no way the original plan could have anticipated the impacts all of those things would have on our world, let alone the Social Security system.

And guess what? At the last moment, before this apocalyptic reduction was necessary, Congress acted and passed sweeping Social Security reform laws – the most significant changes to the system since its inception in 1935, nearly 50 years before. The changes were expected, according to subsequent Trustee reports, to provide solvency of the Social Security trust fund for the coming 75 years (to approximately 2058). And guess what else? The changes enacted had very little impact on the current beneficiaries of benefits – in fact, the largest changes were pushed out to folks who were just entering (or yet to enter) the workforce at that time, those age 22 and under.

So here we are, looking ahead to a time that is remarkably similar – 50 years after the sweeping changes of 1983, and the prediction is eerily similar as well. If nothing changes, benefits will have to be reduced across the board.

And once again, it’s not surprising that the 75-year prediction is set to fall apart at around the 50-year mark. Back in 1983, there’s no way anyone could have predicted the Gulf wars, 9/11, the rise of the internet, among other catastrophes like the Kardashians; not to mention the impact to the Social Security system.

I predict that changes will be enacted, probably in 2032 or even 2033, and the changes will push back the impacts to yet another future generation, for the most part. There may be other changes that will impact certain portions of the beneficiary groups, but I’d expect those to be pushed out past the ages of those currently receiving benefits as well.

What do you think will happen?

The 1040X – 15 Facts About Amending Your Tax Return

amending your tax returnMany circumstances can come up that will result in amending your tax return. It could be that you received additional information contrary to what you originally used for your return… or maybe the IRS sent you a notice about something that needs clarification.

Whatever the reason, you are amending your tax return. This isn’t usually a big deal, especially with software-driven return preparation – but there are a few things you should know about your amended return.

Ten Facts About Amending Your Tax Return

Below are the “top ten” facts that the IRS has recommended for you to know about amending your tax return:

  1. If you need to amend your return, use Form 1040X, Amended US Individual Income Tax Return.
  2. Use Form 1040X to correct previously filed Forms 1040, 1040A, or 1040EZ. The 1040X can also be used to correct a return filed electronically; however, you can only paper-file an amended return.
  3. You should file an amended return if you discover any of the following items were reported incorrectly: filing status, dependents, total income, deductions, or credits.
  4. Generally, you do not need to file an amended return for math errors. The IRS will automatically make the correction. (You still may wish to file an amended return later if the corrections by IRS don’t account for all of your information and result in negative consequences to you.)
  5. You usually do not need to file an amended return because you forgot to include tax forms such as W2s or schedules. The IRS normally will send a request asking for these documents.
  6. Be sure to enter the year of the return you are amending at the top of Form 1040X. Generally you must file Form 1040X within three years from the date you filed your original return or within two years from the date you paid the tax, whichever is later. (This rule applies strictly when an amendment that results in a refund for you.)
  7. If you are amending more than one year’s tax return, prepare a 1040X for each year’s return and mail them in separate envelopes to the IRS center for the area in which you live. The 1040X instructions list the addresses for the centers.
  8. If the changes involve another schedule or form, you must attach all changed forms to the 1040X.
  9. If you are filing to claim an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.
  10. If you discover that you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges. Interest is charged on any tax not paid by the due date of the original return, without regard to extensions.

In Addition…

In addition to the top ten from the IRS, you should also keep these things in mind:

  1. Consider if the change impacts your state return; file an amended return with your state using the instructions from your state. Most often this requires your federal amendment to be processed and accepted as final before filing the state amendment.
  2. If you’re filing for a retroactive credit consider how the credit could be impacted by changes in your filing status, income, etc., if you filed it for the current year instead of retroactively. It could be in your favor to claim the credit currently, albeit much later, rather than retroactively.
  3. Although the “rule of thumb” time limitation for filing amended returns is the later of 3 years after the filing date of the original return including extensions or 2 years after the tax is paid, for certain items, the time limitation is extended. For example, for disability where the taxpayer is unable to manage financial affairs, the period of limitation for filing a claim for refund is suspended until the disability is no longer an issue. Another example regards worthless debts or securities: the limitation is 7 years after the due date of the return for the year that the debt or security became worthless.
  4. It is not allowable to change your filing status from Married Filing Jointly to Married Filing Separately after the original due date of the return, including extensions.
  5. If you file Form 1040X on or before due date of the original return, the 1040X will be treated as the original return.

As always, contact your tax professional to help you with your amended return if you have questions or concerns (or call me if you like).

Medicare Enrollment Periods

enrollment periodsIf you’re eligible (or soon to be eligible) for Medicare, you may have noticed that there are specific times when you can enroll, add, change or drop coverage. These enrollment periods can be confusing! There are so many different enrollment periods and each has different rules. In this article we’ll attempt to make the enrollment periods a bit less confusing.

Initial Enrollment Period

When you first reach age 65 and become eligible for Medicare benefits, there is a set period of time when you can enroll. The initial enrollment period actually begins before your 65th birthday, and is a total of seven months. This includes the three months before your month of birth, the month that you reach age 65, and the three months after your birth month. So if your 65th birthday is in July, your initial enrollment period starts on April 1 and lasts until October 31.

During this period you can enroll in Medicare Part A and Part B. You can then choose other additions to your Medicare coverage, including prescription drug coverage, a Medicare supplement policy (Medigap), or maybe a Medicare Advantage plan.

The month in which you enroll determines when your Medicare Part B coverage will begin. If you enroll in Medicare during the any of the 3 months prior to your 65th birthday, your coverage will begin during the month of your birthday. If you enroll during your birthday month, coverage begins on the first of the following month. If you enroll in the month after your 65th birthday, coverage is delayed until the first of the month that is two months after your birthday. If you wait to enroll during any of the remaining 2 months in your initial enrollment period, there will be a three-month lag before your benefits will begin. For example, if your birth month is July and you wait until August to enroll for Medicare, your Part B coverage will not commence until October 1. If you enrolled in September, the coverage would not begin until December 1.

Medicare Part A is different. Your coverage begins on the first of the month when you reach age 65, even if you enroll up to 6 months after your birthday. Beyond 6 months after your birthday, Medicare coverage always begins retroactively 6 months before the date that you enroll.

Delaying enrollment in Medicare Part A until some time after your initial enrollment period carries no penalty (unless you’re not eligible for “free” Part A). However, delaying Medicare Part B enrollment until after the initial enrollment period can result in premium penalties.

Medigap Initial Enrollment Period

Once you have enrolled in Medicare Part B, you have a 6-month period when you can enroll in Medigap. Generally, if you do not purchase a Medigap plan during this period, you may be required to provide evidence of insurability to the insurance provider if you attempt to purchase a policy later. This may result in higher premiums or denial of coverage altogether, if there is a pre-existing condition.

During the 6 months after Medicare Part B enrollment, insurers are required to accept you as an enrollee in whatever Medigap Plan you choose, as long as you can pay the premiums.

You can also make changes to your Medigap plan on an annual basis, however, as noted elsewhere, making changes to your Medigap plan may require additional information about your medical history, especially if changing to a more comprehensive plan. Choosing a less comprehensive plan typically does not cause any issues.

Annual Enrollment Periods

There are several annual enrollment periods that you need to be aware of. There is the General Enrollment Period, the Open Enrollment Period, and the Medicare Advantage Open Enrollment Period. These are explained briefly below:

General Enrollment Periods – This is from January 1 to March 31 each year. During this period you are allowed to enroll in Medicare Part B if: 1) you didn’t sign up when you were first eligible during your initial enrollment period; and 2) you aren’t eligible for a Special Enrollment Period. You can always sign up for Medicare Part A at any time, with no penalty.

When you sign up for Medicare Part B during the General Enrollment Period, most often you will pay a penalty on your premiums for Medicare Part B. There is no penalty for signing up for Medicare Part A late if you’re eligible for the “free” coverage. If less than a year has passed since your initial enrollment period, you may not have a penalty for your late enrollment.

Your Medicare Part B coverage will not begin until July 1 of the year that you sign up during the General Enrollment Period. Medicare Part A coverage is back-dated to six months prior to your enrollment date, or the month of your 65th birthday if you enroll less than six months after that date.

If your enrollment in Medicare Part B is completed during the General Enrollment Period, you will then have an opportunity to acquire a Medicare Advantage plan or add a Medicare Part D plan to your coverage during the period between April 1 and June 30 of that same year. If you do not add these items during that period, you must wait until the following fall’s Open Enrollment Period (see below) if you want to add or make changes to your plan(s).

Medicare Advantage Open Enrollment Periods – In addition, during this same period from January 1 through March 31 each year, you can change from one Medicare Advantage plan to another. You can only make this change during this period if you are currently have a Medicare Advantage plan. You can also make the switch from Medicare Advantage to original Medicare (Part A and Part B, with or without Part D and/or Medigap) during this period.

You cannot switch from original Medicare to a Medicare Advantage plan during this period. That is only allowed during the fall Open Enrollment Period (covered next).

Open Enrollment Periods – this period is also known as the “fall open enrollment period”, because it’s the only period that occurs during the fall (all others are in the first part of the year). From October 15 to December 7 each year, you are allowed to make several changes to your healthcare coverage. This is the period that allows the most flexibility in changing up your overall Medicare coverage landscape.

During this period, you can switch from original Medicare (Part A and Part B) to a Medicare Advantage plan. You can also do the reverse – switching from a Medicare Advantage plan back to original Medicare (Part A and Part B).

You may also switch your coverage from one Medicare Advantage plan to another Medicare Advantage plan. The plan you choose may or may not have prescription drug coverage. So you may also add a Medicare Part D (prescription drug coverage) plan to your coverage at this time. You can switch from one Part D plan to another during this period, or you can drop your Part D coverage.

If dropping Medicare Part D coverage, you can either choose to go without prescription drug coverage, or you can add a Medicare Advantage plan that includes prescription drug coverage.

Special Enrollment Periods

Medicare Part B Enrollment Period – If you (or your spouse, or other family member if you’re disabled) are working and you’re covered by a group health plan through your, your spouse’s or family member’s employer or union based on that work, you may have a Special Enrollment Period when that coverage ends. This special enrollment period is available when there has been a change to your situation regarding the creditable coverage.

Your Special Enrollment Period includes the entire time from your 65th birthday and are employed and covered by a creditable health plan, plus 8 months after your coverage ends. The 8 months begins the month after the employment ends, or the month after the group health plan based on the employment ends. These are the two changes that typically occur that allow for a special enrollment period. Another situation that provides a special enrollment period is divorce from or death of a spouse or family member whose employment was providing creditable coverage.

Additionally, a Special Enrollment Period may be available to you if you discontinued Medicare Part B because you started being covered by an employer plan (either your own or your spouse’s). When that coverage comes to an end, you have 8 months to enroll again in Medicare during the Special Enrollment Period. Otherwise you’ll have to wait until an annual enrollment period and likely be assessed a penalty for late enrollment.

You will not be assessed the late enrollment penalty for either paid Medicare Part A or Medicare Part B if you’re eligible for a special enrollment period and you enroll during the applicable period. Delay past the end of the special enrollment period will cause the same kinds of penalties to apply as if you delayed enrollment until some time after your initial enrollment period.

It is important to note that COBRA and retiree health insurance are not considered as creditable coverage that would allow you to utilize a Special Enrollment Period. Only active employee health insurance is allowed to provide for this special treatment. Furthermore, COBRA coverage coming to an end (COBRA provides coverage for up to 18 months after employment has ceased) is NOT an event that starts a Special Enrollment Period. Only the original plan coming to an end or the end of employment will trigger the Special Enrollment Period.

If you sign up for Medicare Part B while you are still covered by the employer plan, or during the first full month that you no longer have coverage from your employer, Medicare Part B coverage begins on the first day of the month that you enroll. You can choose to delay this coverage to begin with any of the succeeding three months after enrollment.

If you wait until any of the remaining 7 months of your Special Enrollment Period to enroll in Medicare Part B, coverage will begin on the first day of the month after you’ve enrolled.

The coverage delays when signing up during a Special Enrollment Period are much less than the 6-month delay with the Annual Enrollment Period, because the AEP signifies a period of time when you did not have creditable coverage but were eligible for Medicare coverage. Any time there has been a gap in coverage, insurers require a delay before coverage to allow for any adverse conditions that may have commenced.

Special Enrollment Period for Medicare Advantage and Part D – For a Medicare Advantage plan and Medicare Part D, the Special Enrollment Period lasts only two months after your employer or group health plan has ended. Your coverage begins on the first of the following month after you enroll.

In addition to the Special Enrollment Period that is available when you have left your employer or your employer health plan has terminated, there are several other conditions that may provide for a Special Enrollment Period. Many of these conditions only apply to either Medicare Part D and/or Medicare Advantage plans. This is a reflection on how fluid the prescription drug coverage landscape can be.

Below is a list of the circumstances that Medicare has developed that may provide you with a Special Enrollment Period. For more details on the periods, please go to Medicare’s website ( and search for “special enrollment period”.

  1. You have creditable drug coverage or lose creditable coverage through no fault of your own
  2. You choose to change employer/union coverage (through either current or past employment)
  3. You are institutionalized
  4. You are enrolled in a State Pharmaceutical Assistance Program (SPAP)
  5. You have Extra Help, Medicaid, or a Medicare Savings Program (MSP)
  6. You gain, lose, or have a change in your Medicaid, MSP, or Extra Help eligibility status
  7. You want to disenroll from your first Medicare Advantage Plan
  8. You enroll in/disenroll from PACE (Program of All-Inclusive Care for the Elderly)
  9. You move (permanently change your home address)
  10. You have had Medicare eligibility issues
  11. You are eligible for a Special Needs Plan (SNP) or lose eligibility for your SNP
  12. You are passively enrolled into a Part D plan or Dual-eligible SNP (D-SNP)
  13. You experience contract violations or enrollment errors
  14. Your plan no longer offers coverage
  15. You disenroll from your Medicare Advantage Plan during the Medicare Advantage Open Enrollment Period
  16. You qualify for a new Part D Initial Enrollment Period when you turn 65
  17. You want to enroll in a five-star Medicare Advantage Plan or Part D plan
  18. You have been in a consistently low-performing Medicare Advantage or Part D plan
  19. Your Medicare Advantage Plan terminates a significant amount of its network providers
  20. You experience an “exceptional circumstance”

As noted above, the Special Enrollment Period for Medicare Advantage plans and Medicare Part D plans only lasts for two months after your employer-provided or group insurance plan has ended. This one can pass by in a hurry, you need to pay close attention if you need this coverage during a Special Enrollment Period.

IRA Options for a Surviving Spouse Under Age 59 1/2

surviving spouseAs a follow-up to an earlier article on Options For a Spousal Inherited IRA, I wanted to address the specific situation that occurs if you, as a surviving spouse, have inherited an IRA from your spouse and you’re under age 59½. There are a couple of choices available to you – which can pose a dilemma.  As we have discussed in other articles, you have the option of leaving the funds in the original IRA (owned by your late spouse), which will allow you, as a spouse, to withdraw from the account at any time without penalty.  There is no 10% penalty for the withdrawal in this situation, as there would be with most other withdrawals before age 59½.  The downside to leaving these funds in the name of your deceased spouse is that, upon your death, the distribution options are usually unfavorable for that situation, and since you are not the original owner you can’t make changes.

On the other hand, as a surviving spouse you also have the option of moving the funds from the original account into an account in your own name – which will give you the flexibility to make changes to the distribution choices.  The problem with this move is that once you have moved the funds into your own account, the exception to the 10% penalty for early withdrawal no longer applies.  So, unless one of the other 72(t) exceptions applies you can not access the funds in the new, rollover account until you reach age 59½.

How to Deal With the Dilemma as a Surviving Spouse

How should you deal with the dilemma?  It depends completely on your specific situation, but below are some strategies you might consider:

If you would be in dire financial straits without access to funds from the IRA, leave it in your late spouse’s account, at least until you reach age 59½. Then later you can rollover the funds into your own account.  Since there is no deadline for this rollover, you have the flexibility to treat the account in this fashion.  If the event of your untimely death before rolling over the account would produce undesirable distribution of the remainder, you can address this by purchasing term life insurance with account proceeds, timing the insurance to expire upon your rollover.

If you’re well-to-do and don’t need funds from the IRA (okay, at least comfortable), or in ill health, you should not delay in rolling over the funds into your own account. This is because when you’ve made this move, you can be in control of the disposition of the account upon your death.  If for some reason you later need to access the funds in the account and you’re still under age 59½, you can either set up a Series of Substantially Equal Periodic Payments (SOSEPP) or use one of the other 72(t) exceptions if available.

What If the Account Requires Lump-Sum Distribution?

If there is a reason to leave the funds in the deceased spouse’s account but the account provisions require that you take a lump sum distribution immediately, you can roll over the account to an Inherited IRA, maintaining the original owner’s name, essentially acting as if you are a non-spouse beneficiary. This third option will give you the freedom to begin taking distributions (at least the Required Minimum Distributions, RMDs, but you can take more if needed) from the account, without penalty.  Then you can later rollover the funds into your own account at a later date when you no longer need the distributions or you reach age 59½.  This later rollover provides you with the option of receiving distributions in smaller amounts (no more RMD until 70½) and protecting the tax-deferred status as long as possible – in spite of the provision from the original account that required lump-sum distribution.

Tax-Efficient Charitable Giving from your IRA

charitable givingYou may have noticed with the new tax law that was passed for 2018, there was a significant change to the standard deduction. At first glance, even the topic of standard deductions seems very tax-tech-y, and something that many folks don’t pay attention to at all. But hidden in the details is something that may be of interest: a better, more tax-efficient way of charitable giving, using your IRA.

Granted, this is not going to apply to everyone. There are some restrictive rules in place. Specifically, you must have an IRA, and you must be at least 70½ years old, subject to Required Minimum Distributions (RMDs). And, you must be in a position where you are inclined to make charitable contributions. You may have made such contributions in the past, but probably not in the manner I’m talking about. Chances are, you probably made out a check to your chosen charity, and then when you did your income taxes you itemized the amount for deduction from your income. This is usually done with a form called Schedule A, which is attached to your standard Form 1040 tax return.

Everything worked just fine in the past with that process. However, some of you may have noticed that, over time, you may have switched from itemizing your deductions (with Schedule A) to using the standard deduction. This occurs when the standard deduction is larger than the total of your itemized (Schedule A) deductions.

I suspect this will be more common starting with your 2018 tax return, because the standard deduction has increased significantly. In 2017, the standard deduction for a married couple filing jointly was $12,700. And if they were both over age 65, the standard deduction was increased to $15,200. For many folks, that’s a lot of charitable contributions! Of course, charitable contributions are only a part of what makes up Schedule A itemized deductions – you’d include your real estate taxes, state and local income tax, sales tax, and medical expenses above a certain amount.

So, with those items added together with your charitable contributions, it’s quite possible for many taxpayers to breach the standard deduction amount and qualify to itemize.

But for 2018, the standard deduction for the same married couple, over age 65, will be $26,600 – an increase of more than $11,000 over the 2017 amount. (There are many other changes to the tax laws including the elimination of personal exemptions that makes this increase less valuable, but that’s a topic for another time.) Because of the new amount, along with some limitations that have been put in place on certain itemized deductions, many if not most taxpayers will be using the standard deduction for the first time in 2018.

With this in mind – you might wonder about whether it’s worthwhile to make those charitable contributions any more… after all, if you can’t itemize, those contributions won’t help your tax situation out, so why bother? (Many charities are looking at this as well and are quite concerned!) Hopefully, you were planning your usual support of the charity, just not getting the tax benefit from it like you have in the past.

But what if there was a way to be tax-efficient with your charitable giving? If you meet the restrictions I mentioned above (at least 70½ years old, and subject to RMDs from your IRA), you have exclusive access to a very tax-efficient way of charitable giving from your IRA. It’s called a Qualified Charitable Distribution (QCD), and it’s been around for quite a while – but I suspect it will become more popular with the changes in the tax law.

Charitable Giving from Your IRA

Below is a partly-fictitious interaction that I had with my father. You need to know that he’s far better looking in real life than I can make him look with my writing, for example. We had a similar discussion but I’ve fleshed this out much more and included purely made up figures to simplify the example.

Me: So, have you noticed the changes to the standard deduction from the new tax law? Probably won’t have to itemize your deductions this time around…

Dad: Yeah, we’ll still make the same charitable contributions we have in the past – but losing that deduction along with all the other changes will be hard to swallow. (See, I couldn’t make him look as dignified in writing as he really is. Try to cope with it.)

Me: Well, did you know there’s another way you can make those contributions, and still get benefit on your tax return? It’s called a Qualified Charitable Distribution (QCD).

Dad: I’ve heard of that, but never bothered to look into it. Seems like a lot of paperwork to do pretty much the same thing as we’ve always done.

Me: Au contraire! (We hardly ever speak in french, that was only for dramatic purposes.)

I’ll show you how it works:

Your income is $65,000* before any deductions. In the past, your itemized deductions came up to $20,000, and your personal exemptions were $8,100 so your taxable income was $36,900. Your itemized deductions included $10,000 that you send to various charities through the year, and the rest is real estate tax and medical expenses. Your annual RMD from your IRA is $5,000. (*All of these figures are completely made up, nice round figures to help with the example.)

In 2018, since your itemized deductions are less than the standard deduction, you’d just use the standard deduction. So your $65,000 income minus $26,600 equals $38,400 (remember there are no personal exemptions in 2018). That’s a higher taxable income than you had in 2017, because of the changes to the law. The lowered tax brackets would mean a lower overall tax bill, but you’re paying tax on a higher amount of income – and you didn’t change anything!

Now, if you used a QCD for your RMD of $5,000, your taxes would look a bit different. The QCD amount is not included in your income, so the income figure is reduced off the start to $60,000. Then then new standard deduction of $26,600 is subtracted, for a taxable income of $33,400. That’s $3,500 less than last year, and you didn’t have to itemize. How about that?

Dad: Well, that’s pretty amazing. So I only have to use this QCD and I can reduce my taxable income by $5,000?

Me: It gets better. Since you make a total of $10,000 in charitable contributions every year, you could use the QCD to distribute that full $10,000 to your chosen charities, and reduce your taxable income by that full amount.

If you send the full $10,000 to your chosen charities using QCD, your overall taxable income would be reduced even further, down to $28,400. That works out to a $1,200 reduction in taxes!

Dad: Well – I bet it’s really a hassle to do these QCDs. I don’t like hassles. (True statement. He doesn’t like hassles.)

Me: Not at all. You already have to notify your IRA custodian annually to have your RMD withdrawn. All you need to do is tell them to send the specified amounts to your chosen charities as Qualified Charitable Distributions. Then they take care of the rest of it. You’ll need to make sure you keep record of the QCD so that you can properly prepare your taxes – currently the 1099R forms don’t reflect whether your distribution was a QCD – so this is really important!

And so it went (fictitiously).

So if you fit into the parameters outlined above, you too could use this method to have more tax-efficient charitable giving. If you need more details, just reach out to me.

Astute reader BB pointed out that you must actually be 70½ years old to use the QCD. This could represent a challenge in timing if your 70½ age occurs very late in the year. BB also pointed out a problem with the earlier version of this article in that currently, Form 1099R does not have a provision or code to indicate that the distribution (or part of it) was a QCD. You’ll need to maintain your own records and make this notation in your tax return. 

Don’t Dismiss That “Small” Pension

loanFrequently, I’ll meet with clients to go over a retirement plan. As is typical, we look at current investments, account balances, Social Security, etc. Often these conversations revolve around distributions from retirement plans and cash flow planning to reduce the probability of portfolio failure, and ensuring an income stream that is congruent with the clients’ retirement goals.

Sometimes clients will also have small pensions from their current or former employer and they will tell me that they are small, trivial, or not worth considering.

Whenever I hear those words or something similar, I try to explain to the clients that however small or trivial, it’s still a guaranteed income stream that will last the rest of their lives in many cases.

For example, I have seen clients think that a $150 monthly pension wasn’t a big deal. But when I present to them that there’s an amount for a “date night” once a month, they can visualize using that money for the date night. A similar expense would be cable TV, funding a grandchild’s 529 plan, etc.

In another example, some clients had roughly $350 in monthly pension money coming from two different sources. They were concerned about having a travel fund in retirement. Their travel budget in retirement was approximately $8,000. When I mentioned they could allocate the pension money to fund half of their annual travel budget, they could visualize the pension money being used, and were almost relieved that they didn’t have to worry about where (half) of their travel budget would come from.

In other words, half of their travel budget was guaranteed by the “small” pension money that was almost an afterthought of our conversation.

The point is, with a pension, that amount can be allocated to cover a specific retirement expense and individuals can know that a certain expense or expenses are going to be met by the pension. It means one less expense to worry about where the money is going to come from, and it can reduce stress knowing that no matter what, the client is always guaranteed to meet that expense.

Put another way, per the examples above, clients can guarantee they will have a travel fund, fund a grandchild’s education, or a monthly date night in retirement.

Government Pension Offset for Social Security

willen gpo 1969 by Mr ATMThere’s a somewhat confusing situation that occurs when a spouse is receiving either a Spousal benefit or a Survivor’s benefit from Social Security while at the same time is receiving a pension from a federal, state, or local government.  This is specifically so if the pension being received is from a job where Social Security taxes (OASDI) were not withheld. This situation triggers the Government Pension Offset, or GPO.

What happens is that the Social Security Administration will reduce the Spousal or Survivor’s benefit by a factor equal to two-thirds of the government pension that he or she is receiving.  This is called the Government Pension Offset, or GPO (yay, another acronym from the Social Security Administration SSA!)  The GPO is often confused with the Windfall Elimination Provision (WEP), but they are different provisions.


Eligibility for Spousal or Survivor’s benefits are based upon your spouse’s record with the Social Security administration.  If your own benefit is greater than the Survivor’s or Spousal benefit, of course you would not be receiving the Survivor’s or Spousal benefit. You can only receive either your own benefit or the Survivor’s or Spousal benefit, whichever is greater, unless you’re using a restricted application.

If you are receiving a pension from a government job that did not require you to have Social Security tax withheld, your own Social Security record doesn’t reflect the income earned from that job. The government pension is designed to take the place of Social Security benefits – at least to some degree.  This particular quandary was first addressed in 1977 with the amendments in that year – but it really went too far at that stage.

1977 Amendment

Government pensions from jobs not subject to Social Security tax withholding are designed to be equal to partially pension, and partially compensation intended to replace Social Security benefits for the retiree.  In 1977 an amendment was made to the Social Security Act to address the fact that, otherwise, a Spousal benefit or Survivor’s benefit would be compensating the Spouse more than the system originally intended.  The 1977 Amendment offset (reduced) the Social Security Spousal or Survivor’s benefit by one dollar for each dollar of pension received from government work that was not subject to Social Security tax. This only applies if the pension is from a job that the Spouse or Survivor worked.

1983 Amendment

In the 1983 Amendment, the Government Pension Offset (or GPO) was improved for Spousal and Survivor’s benefits. Instead of the original dollar-for-dollar offset, now the Social Security Spousal or Survivor’s benefit is only reduced by two-thirds of the government pension amount.  This more accurately reflects the fact that the government pension is part pension and part compensation to replace the Social Security benefit.

When Does the GPO NOT Apply?

It’s possible that your particular situation may provide for your Spousal or Survivor’s benefit to not be impacted by the Government Pension Offset.  Listed below are several situations that will permit the GPO to not apply:

  • If you are receiving a government pension that is not based on earnings;
  • If you are a state or local employee whose government pension is based on a job where you were paying Social Security taxes
    • on the last day of your employment and your last day was prior to July 1, 2004; or
    • during the last five years of employment and your last day of employment was July 1, 2004 or later.  Depending upon the circumstances, fewer than five years could be required for folks whose last day of employment fell between July 1, 2004 and March 1 2009 inclusive.
  • If you are a federal employee, including Civil Service Offset employee, who pays Social Security taxes on your earnings.  (A Civil Service Offset employee is a federal employee who was rehired after December 31, 1983, following a break in service of more than 365 days and had five years of prior civil service retirement system coverage);
  • If you are a federal employee who elected to switch from the Civil Service Retirement System (CSRS) to the Federal Employees’ Retirement System (FERS) on or before June 30, 1988.  If you switched after that date, including during the open season from July 1, 1998 through December 31, 1998, you need five years under FERS to be exempt from the GPO;
  • If you received or were eligible to receive a government pension before December 1982 and meet all the requirements for Social Security Spousal benefits or Survivor’s benefits in effect in January 1977; or
  • If you received or were eligible to receive a federal, state or local government pension before July 1, 1983, and were receiving one-half support from your spouse.

Unlike WEP, there is no way to work your way out of the impact, other than the aforementioned final five years covered option.

I’m delaying my Social Security. Here’s why

delaying my social securityIf you’ve been reading here very long (or pretty much anywhere else for that matter), you’ve probably seen a lot of opinions on Social Security claiming strategies. It’s a very personal choice, because the only way to really be “right” is to know how long you (and perhaps your spouse) will live. In my own case, I’m delaying my Social Security benefits to the latest possible age. This article will show you why.

Delaying my Social Security

I intend on delaying my Social Security filing to age 70. At the same time, we intend for my wife to begin her Social Security at age 62. We’ve chosen this strategy for three primary reasons:

  1. By delaying, I am maximizing an income stream that is truly unique – no other stream of income that I know of has these three factors:
    1. has inflation protection (annual cost of living increases) built in;
    2. has no upper limit (no matter how long I or my spouse live, the benefit continues); and
    3. is tax-preferential (at max, 85% is included as taxable income).
  2. By delaying and maximizing my benefit, I am also maximizing the survivor benefit that will be available to my wife if I pre-decease her.
  3. By starting my wife’s benefit early, we will receive that benefit for the longest possible time.

By using these two strategies, we are maximizing the timeline of receipt of my wife’s benefit, even though it will be reduced. Her benefit amount will be a bit less than mine, but not so low that she will be eligible for a spousal benefit. This way we’ll receive her benefit for 8 years before we begin receiving my benefit. At the same time we’ll maximize the amount of the benefit that potentially will last the longest – assuming one or the other (or both of us!) live past approximately 82 years old. This maximized benefit amount will have the three factors (inflation protection, no upper limit, and tax preferential) built-in to the highest amount we can get.

I have no doubt that the system will be adjusted to deal with the coming trust fund shortfall and have faith that current beneficiaries will continue to be paid. It’s happened before, and will happen again. Nonetheless, the filing strategy that I’ve outlined above does take this factor into account. The possible shortfall of the system is yet another reason to start one benefit earlier, in order to receive it for a longer period of time.

Comparing to other sources

The three factors listed above (why I’m delaying Social Security item #1) are truly unique. Let’s look at other income sources to compare (using the a, b, and c factors from above):

IRA/401k account –
a) has potential inflation protection built in, but only to the extent that the market performs well during the period. By comparison, Social Security’s COLAs are built-in to the system and apply according to economic changes.
b) It could be argued that an IRA/401k, if you only take sustainable withdrawals (using, for example 4% as your rate), that the fund could last for your entire life. But the point is that your 401k or IRA is a finite amount – and it can be drained completely if you had to have the money. Then you’re done. This is not so with Social Security benefits, at least under today’s rules. You’ll have another check coming the following month, as long as you live.
c) IRA/401k funds, if they are completely tax-deferred, are included 100% as taxable income. By comparison, Social Security benefits can be excluded from tax altogether, or included at a 50% rate, or at maximum an 85% rate. This item is eliminated if your IRA or 401k is Roth-type, but the tax being paid up front on contributions offsets some of this benefit.

Pension –
a) some pensions have inflation protection built in, but the majority do not.
b) typically pensions are payable over your entire lifetime, and may also be provide income for your spouse’s lifetime if you’ve chosen that option. But choosing a 100% joint-and-survivor option results in a reduction of your pension benefit in order to provide the spousal lifetime option, unlike Social Security benefits. Your spouse’s survivor benefit does not reduce your own benefit by providing it to him or her. It is true that the spouse’s own benefit will go away if he or she becomes eligible for the survivor benefit.
c) most pensions are 100% included in income. Some pensions include a provision for pro-rata return of your own participation in the plan (contributions you’ve made) tax-free, but this is less common than the 100% variety.

 Annuity –
a) depending on the type of annuity, some inflation protection is built in, but often only to the extent of market returns (as with the IRA/401k).
b) as with pensions, depending on the type of annuity and the payment plan, there may be income for your life and your spouse’s life. These options are not without downsides, as the available income will be reduced to provide your spouse with lifetime benefits as well.
c) like pensions, there may be a provision for tax-free return of contributions (depends on your annuity), but otherwise are generally 100% included as taxable income.

So, you can see, there’s no silver bullet. The factors listed above are enough for me to choose delaying my Social Security benefit to age 70, while starting my wife’s benefit earlier. And as mentioned before, this is a personal decision, bound to be different for everyone. What are the driving factors behind your choice of Social Security filing strategies? Share in the comments, I’m interested in knowing what you’re thinking!

Maintaining Your Resolve During Time of Uncertainty

7cdfzmllwom-william-boutLife is full of uncertainty and sometime unexpected events can cause us to overreact, make impulse decisions, and behave in a way that would otherwise run counter to our long-term goals, dreams, and habits.

Surprise events such as a market crash, loss of a job, a spouse, divorce, or other traumatizing events can have the effect of instilling apathy towards our goals and bring the temptation to deviate from our plans.

The following are some ways to maintain resolve when life happens – and the urge to give up on goals is high.

  1. Review your plan and goals. Whatever the plan or goal, be it financial, life, occupational, etc., take a moment to review the goal you’ve created. If not yet in writing, write the goal down, quantify it, visualize it and remind yourself why it’s a goal in the first place. Picture yourself having achieved the goal. How do you feel? What did you overcome to get there?
  2. Grit, or sometimes called perseverance, drive, or dedication means continuing to do something even when you don’t feel like it. There’s a saying that nothing good comes easy. Sometimes this is true. If everything came easy, life would be full of mediocrity. Choosing to push through and having grit to stick to your plans will keep you focused and on the right path, despite wanting to give up.
  3. Take some time to reflect and think about your plans, goals and aspirations. Can they be improved? If so, how? The answer might not come right away, but often when we think and reflect on our plan we can generate new ideas to make achievement come faster, more efficient, or both.
  4. Having perspective means being able to look at your situation from another point of view. This alternate point of view may arise while reflecting, or it may come because of putting yourself in another individual’s shoes and looking at your situation from the outside.
  5. Talk to a professional. Whether it’s life, financial, business, or personal, talking to a professional who has expertise can help keep you focused. A professional may present some additional ideas, perspective, and guidance on how to handle a situation. Additionally, it may also help you if you’re feeling anxious (say, about market volatility) to talk to a professional and review your goals, plans, and why you may be having feelings of doubt. Bouncing your feelings off another individual can help keep you relaxed and focused on what you can control, and what you cannot.

Be grateful. Having an attitude of gratitude can help boost your mood, keep you focused, and clear your thinking. Think about what you have accomplished with your goals or plans, what you overcame in the past, and what life has given you. Being grateful directs our attention to the positives in life, while removing focus on the negatives.

Social Security Retirement Benefits – For Your Child?

tangible and intangible benefits for a childIt may not be all that common, but if you’re eligible for and drawing Social Security retirement benefits and you have a child (or children) under age 18 – did you realize that your child (or children) is eligible to receive a benefit from Social Security as well?  This is in addition to the “child in care” benefit that your spouse is also eligible to receive upon your filing for benefits – subject to a Maximum Family Benefit, which is usually between 150% and 180% of the Primary Insurance Amount or PIA that you, the primary beneficiary have earned.

The same holds true for the child of a parent who is receiving Social Security disability benefits.

It’s true.  When you begin receiving Social Security retirement benefits (even if it’s early and therefore reduced), your child (or children) under age 18 is eligible for a monthly benefit equal to 50% of your PIA (not the reduced benefit).  This benefit is payable until the month the child reaches age 18.

In a much more common situation, the same may hold true for grandchildren under the care of their grandparent, in the case where the grandparent is providing the household’s income (or a majority of the household’s income) and is receiving Social Security retirement benefits.  According to recent statistics, this is a sizable and growing group – apparently around 4.5 million children are living in homes headed by grandparents.  These children may be entitled to Social Security benefits if their grandparents are receiving benefits.

A couple of things to note:

  • A child is always deemed dependent on his parent (mother or father).  The fact that the parent and child do not live in the same home is not a factor unless the child has been adopted by another person.
  • The parent’s status with regard to contributing to the child’s support is not a factor.
  • Length of time that the parents were married, if ever, is not a factor.
  • The child is considered dependent on a stepparent if 1) the stepparent is providing more than 50% of the child’s support; or 2) the child lives with the stepparent.
  • A child is entitled to benefits on a parent’s or stepparent’s record even if the marriage between his or her parents or his parent and stepparent ends.
  • The child’s benefit can be lost (at least partly) if the child works and earns more than $17,040 (in 2018).
  • The benefit ends at the child’s age 18, or if the child marries.  This may be extended to age 19 if the child is still in elementary or high school.  The benefit extends further if the child is disabled, and does not stop if the child marries. The child’s disability must have begun before the child’s age 22.

Withholding and Social Security Benefits

spewing out fire by SudhamshuMany folks find, upon filing their income tax return, that a portion (often a significant portion¹, up to 85%) of their Social Security benefits are taxable.  Upon discovering this, it’s also often a surprise that, since the benefit is taxable, there hasn’t been enough tax withheld throughout the year. This not only requires you to pay up come April 15, but it can also cause a penalty for underpayment of tax to be applied.  This underpayment penalty is likely if the amount of underpayment is $1,000 or more. You need to adjust withholding.

There are many ways to deal with this situation – it’s not required that you withhold tax from each and every source of income, as long as you have the tax withheld or timely estimated payments are made, it doesn’t matter the source of the funds.  Listed below are four withholding methods to help make sure you don’t have an underpayment penalty.

Withholding Methods

Estimated Tax Payments. This method isn’t actually withholding, but it achieves the same purpose.  On April 15, June 15, September 15 and January 15, payments are made to the IRS, often in equal amounts.  In addition, any overpayments that you made in the previous year can be applied in place of any portion of the estimated payments you’ve calculated (more on that later).  It’s important that the estimated payments are made in relatively equal portions throughout the year, otherwise you may still be subject to an underpayment (or late payment) penalty based on the timeliness of your estimated payments. IRS expects you to have made payments throughout the year (if using estimated payment vouchers) that match up with your income. So in other words, it’s not enough to make one big estimated tax payment at the end of the year, you’ve got to spread it out.

Unless you use the next method, that is…

Withholding From an IRA Distribution. This method is a little-known way to deal with meeting the withholding requirements. Essentially, when you take a distribution from your IRA (or Qualified Retirement Plan such as a 401(k) plan), you have the option to have the custodian withhold taxes and report them to the IRS.  No matter if you take a single distribution or quarterly or monthly distributions, the withholding is counted as evenly distributed throughout the year – taking timeliness of the distribution and withholding out of the picture.  For more details on this method, read “IRA Trick – Eliminate Quarterly Estimated Tax Payments”.

Withholding From Your Other Income. You probably already know this, but you can have tax withheld from many other sources of income.  Pensions, annuities, part-time work, and the like, can all be set up with tax being withheld throughout the year.  This is accomplished by filling out a Form W-4 (Form W-4P for pensions). You can set the amount of withholding to literally any amount that makes sense for your situation.

Withholding From Your Social Security Benefit. Much the same as all of your other income, you can set up your Social Security payments to have tax withheld.  This is accomplished by filling out a Form W-4V, and selecting the percentage of your monthly benefit that you’d like to have withheld. You can choose from 7%, 10%, 15% or 25% to be withheld.  You can find Form W-4V at the IRS website or by calling 800-829-3676.

How much should you have withheld?  Of course, that answer is going to be different for each person.  It’s determined by how much tax you are assessed, how much withholding you have from other sources, and the shortfall in withheld (or estimated payment) tax.  You can get the details on how to calculate the proper amount of withholding or estimated tax payments in the article “Understanding the Underpayment Penalty and How to Avoid It”.

¹ For more information on how much of your Social Security Benefit will be taxable, read “Taxation of Social Security Benefits”.

A Cash Flow Dilemma – Should I take distributions from my IRA or from my taxable account?

dilemme by Môsieur JI know, long title… but I wanted to fully describe the content of this article, which is to answer the following dilemma: I have a sizable IRA and a sizable taxable account that holds appreciated stocks.  I am in need of additional funds (above any RMD required from the IRA) – so which account should I draw the additional funds from?

Taxable account!

There is one school of thought that says you should take the additional funds from the taxable account, because at today’s capital gains rates you will save a bundle in taxes.

The capital gains on your appreciated stock will at most be taxed at 20% under present law.  When you compare this tax rate to the ordinary income tax rates, which top out at 37% for 2018, this is a bargain.  This also assumes that you’ve held the stock for at least 12 months, otherwise your gains would be taxed at your marginal ordinary income tax rate.

It’s a no-brainer, you should always take this extra money from the taxable account, right?  No, not always…

IRA account!

There is another school of thought that says, since appreciated stock receives a step-up in basis, you should leave those funds alone if you can and plan to leave them to your heirs at your death. This way the appreciated portion is never taxed.

So when you consider the concept of paying ordinary tax on your IRA distribution and zero tax on the taxable account (assuming you never need to use those funds) versus paying capital gains on the taxable account and potentially leaving your heirs with a fully-taxable IRA (because IRA funds never receive a step-up in basis), this method seems to make a lot of sense.


In the circumstance where you know you’re going to need most or all of the funds from both accounts, it probably doesn’t make much difference in the long run. But you would likely come out better, at least in the short run, using the taxable funds at today’s low capital gains rates first. This will hold true until changes are made the the capital gains tax rates that might make this method less desirable.

But if your holdings are large enough in either account to cover your needs for the longer term, with some planning of your distributions you might come out better with the second method.  Or rather, your heirs will come out better in the long run, since the step-up rule is unlikely to change anytime soon. (Now watch Congress make a change to the step-up rule!)

IRMAA for Medicare

I know only one person named Irma, and I think she’s a wonderful lady. Unfortunately, a namesake of hers (with a slightly different spelling) isn’t quite so wonderful. Most folks who’ve been introduced to this other IRMAA would agree.

IRMAA stands for Income Related Monthly Adjustment Amount. And if you’ve spent much time looking around at the various provisions related to Medicare, the word “adjustment” raises your “bet I’ve gotta pay more” antenna. Which is exactly right, you’re gonna pay more.

What is IRMAA?

money for irmaaWhen the Medicare Modernization Act was passed in 2003, one of the provisions in that law was to require a sort of means-testing to the premiums paid for Medicare Part B (physicians) and Part D (prescription drugs). It was determined that the subsidization of Medicare costs by the government should be in part borne by folks who have income above certain levels. The income used to determine your IRMAA adjustment is from your tax return 2 years prior to the current year. So ancient history can come back to surprise you when you least expect it.

In today’s world, the 2018 premium for Medicare Part B is $134. However, due to a provision in the law, many enrollees pay only $130 for this benefit. The provision that reduced this group’s premium is all about the annual cost of living adjustments (COLAs) that are added to Social Security benefits. Effectively, the provision says that the annual adjustment to the Medicare Part B premium cannot be more than the rate of the COLA for that year.

In some years, there is no COLA – specifically, in 2010, 2011 and again in 2016. When that happens, the Medicare Part B premium for folks who are collecting Social Security cannot increase. Also, if the COLA is very low (as we sometimes see as well as the zero years), the Medicare Part B premium can only increase by the COLA amount and no more. This is known as the “hold harmless” rule. Click the link for an excellent technical explanation of the hold harmless rule.

The people who were actively collecting Social Security and enrolled in Medicare Part B in the previous year are the ones who are potentially protected by the hold harmless rule. IRMAA then is also applied, such that if the individual’s income is above a certain limit, hold harmless does not protect them. So we have 3 groups that are not protected by the hold harmless rule:

  • those who start Medicare Part B in the current year
  • those who were enrolled in Medicare Part B but not collecting Social Security
  • those with incomes above the IRMAA limits

Part of the law requires that 25% of the projected cost of Medicare Part B is paid for by premiums paid by enrollees. Since the hold harmless rule limits participation by roughly 70% of all Part B enrollees, the remainder of the cost must be picked up by the 30% who fit into the groups above.

All of the unprotected groups start out with the standard $134 per month premium (for 2018). Then the IRMAA earnings limits apply. To make things progressive (such that the more money you make, the higher percentage of the overall cost you bear), there are five levels of adjustment that IRMAA can make:

Single Married Filing Jointly Married Filing Separately Medicare Part B Premium
$85,000 or less $170,000 or less $85,000 or less Standard $134 unless held harmless
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $187.50
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $267.90
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $348.30
$160,001 and up $320,001 and up $85,001 and up $428.60

These levels of adjustment are adjusted for cost of living every year, and often are adjusted more than a standard COLA in order to keep the costs covered. The expectation is that the levels of income will cover expenses at the following rates:

Income level (from above) Rate of payment of Medicare Part B costs Multiplier
1 25% 1.0
2 35% 1.4
3 50% 2.0
4 65% 2.6
5 80% 3.2

To calculate these premiums in future years, given what we know about the rates are expected to cover and the fact that the “standard” Medicare Part B premium covers approximately 25%, you can multiply the standard Part B premium by the multiplier in the table to come up with the rate.

IRMAA for Part D

The IRMAA adjustment for Medicare Part D is a bit different, in that you only know how much additional premium you’ll have to pay if IRMAA impacts you.

The rules are the same, so we have the same group of roughly 70% of all enrollees who are held harmless for increased Medicare Part D premiums. And the income levels are the same as well (at least that part is kept the same!). Since Medicare Part D premiums vary by the plan you’ve chosen from independent insurers (and not a prescibed amount like Medicare Part B), at each IRMAA income level there is an increase, or surcharge, applied to whatever your monthly Part D premium is.

Single Married Filing Jointly Married Filing Separately Medicare Part D Premium Increase
$85,000 or less $170,000 or less $85,000 or less $0.00
$85,000 to $107,000 $170,001 to $214,000 Not Applicable $13.00
$107,001 to $133,500 $214,001 to $267,000 Not Applicable $33.60
$133,501 to $160,000 $267,001 to $320,000 Not Applicable $54.20
$160,001 and up $320,001 and up $85,001 and up $74.80

Appeal of IRMAA

If you have had certain changes to your income over the succeeding two years (since the IRMAA income level used for this year’s adjustments), you may have a case for reconsideration of the IRMAA adjusment. Specifically, if you have had one of these change of life factors:

– spouse death
– marriage
– divorce
– income reduction
– work stoppage (includes retirement)
– loss or reduction of other types of income such as rental income or royalties
– loss or reduction of a pension income

Other than those factors, although it is your right to appeal an IRMAA determination (read that “increase”), there’s not a lot of hope that you’ll be able to fight IRMAA. Unless there’s an error of some type, such as an incorrect tax return, most other IRMAA determinations are upheld.

Keep in mind that these IRMAA adjustments are on top of any adjustments you’re subjected to because of late enrollment in either your Medicare Part B or Part D plan.

Your IRA and Your Spouse – Or Maybe Not

IRAFor anyone who has ever had a 401(k), 403(b), or a deferred compensation (457) retirement plan, (which is a high percentage of you, I assume) – there’s a major difference to an IRA that you might find interesting and/or useful. The difference is in the legal requirements for beneficiary designation.


The Employee Retirement Income Security Act (ERISA), passed back in 1974, set several rules in place with regard to retirement plans – known as qualified retirement plans or QRPs. QRPs include the 401(k), the 403(b), and any other CODA (Cash Or Deferred Arrangement) sort of account provided by your employer. One of those provisions is primarily to protect your spouse. When filling out your paperwork to open the account, you might have noticed on the beneficiary designation page that, in order to designate someone other than your spouse, you are required to get your spouse’s signoff. In this way, your spouse cannot be disinherited from your QRP without his or her specific consent.

I don’t know for sure of any circumstances where this has caused a major problem, but it is a restrictive provision nonetheless. The primary time that this could be a problem is if the spouses are estranged but still legally married, or when a spouse has gone AWOL and cannot be found. Nonetheless, this provision is in place for the protection of the spouse of the account holder.

Upon the death of the account holder, regardless of who is designated as the beneficiary, the spouse automatically is entitled to 50% of the QRP. If someone other than the spouse is named as a beneficiary, the spouse will receive 50% of the account. The spouse can sign a waiver of his or her 50% of the account, but generally these are only accepted if the spouse who signs the waiver is at least 35 years of age, depending on the plan.


On the other hand, an IRA account is not covered by ERISA – and as such does not carry the spousal consent provision. You are free to designate anyone you choose, including a trust or charitable entity, without the knowledge or consent of your spouse. Although this could cause a surprise for your spouse if the first time he or she learns of your beneficiary designation is after your passing – this can provide the IRA owner with a great deal of flexibility in making personal beneficiary decisions.

Don’t get me wrong, I do not advocate keeping secrets with regard to your beneficiary designations. On the contrary, I recommend that you and your spouse talk things over and agree on all things financial, IRAs and other retirement accounts especially. But this provision, or rather lack of a rule, might provide you with some additional leeway that you’re looking for in your unique circumstances.

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