Getting Your Financial Ducks In A Row Rotating Header Image

Back-door Roth Blessed by Congress

back-door RothFor years now, the back-door Roth IRA contribution method has been discussed ad nauseam in the financial industry press. It’s been touted as a possibility, but always with a caveat: taking this course of action may ultimately be disallowed by the IRS. As of the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, all skepticism about this method should be removed.

Let’s back up a bit and talk about the back-door Roth. This is the action where you make a non-deductible contribution to your traditional IRA, followed later by a tax-free Roth conversion of that contribution. Folks often took these steps because they were above the income limits for a normal Roth IRA contribution. The problem was that the IRS had never weighed in on the concept. As such, there were many folks in the industry who took a conservative point of view with regard to this action. The IRS has ways to disallow such an action if they deemed that it was to work around the law. But that’s all over for now.

Tax Cuts and Jobs Act

The back-door Roth contribution is not specifically addressed in TCJA, but it was discussed on the record by the Conference Committee in their Explanatory Statement of the TCJA. In that document, the Conference Committee states in four places that “Although an individual with AGI exceeding certain limits is not permitted to make a contribution directly to a Roth IRA, the individual can make a contribution to a traditional IRA and convert the traditional IRA to a Roth IRA…” (for full context, see the Joint Explanatory Statement of the Committee of Conference, footnotes 268, 269, 276, 277, beginning on page 114.)

This verbiage not only blesses the back-door Roth contribution technique currently and going forward, the matter-of-fact manner of the footnotes seems to declare that this has always been acceptable.

So – have at it with your back-door Roth contributions!

Roth Recharacterization is No Longer Allowed

recharacterizationWith the passage of the Tax Cuts and Jobs Act (TCJA) of 2017, recharacterization of a Roth Conversion is no longer allowed. This begins with tax year 2018.

Briefly, recharacterization of a Roth conversion is (used to be) useful if you wanted to undo a Roth conversion sometime before your tax return is filed for the year in question. If you’d like more information on recharacterization and why you might want (or have wanted) to do this, you can check out the article on Recharacterizing.

So now, if you convert funds from an IRA or 401k into a Roth IRA account, you no longer have this back-out option available to you.

The legislation did not make it clear whether the restriction takes place for any recharacterization after 2017 or if it’s based on any conversion done after 2017. This makes it unclear whether a 2017 conversion could still be recharacterized by October 15, 2018, or if the recharacterization had to be complete by year-end 2017. The verbiage used indicates that the recharacterization disallowance “shall apply to taxable years beginning after December 31, 2017.”

Some think this means the ban applies to conversions after 2017 – while others think this means the ban applies to recharacterizations after 2017. Jury is still out on this, and IRS is likely to clarify later this year.

jb note: Astute super-reader clydewolf mentions: 

Kaye Thomas at says he has confirmed with the IRS
that 2017 Conversions can be recharacterized.,84769

Other types of recharacterization are still allowed – the primary one being recharacterizing of an unintended IRA rollover or contribution that is later disallowed due to income limitations. This type of recharacterization is still allowed after TCJA 2017.

For example, if you contribute the maximum amount ($5,500) to your IRA this year and later you discover that your income is above the limits for a deductible IRA contribution (but still under the Roth IRA contribution limits). You have the option of recharacterizing the contribution in your traditional IRA to a Roth IRA contribution. With this action, your recharacterized contribution will be treated as if made to the Roth IRA at the same time as you originally made it to the traditional IRA – as long as you recharacterize before the filing date of your tax return (generally October 15 of the following year after the contribution).

Non-Spouse Rollover of Inherited IRA or Plan

750-year-old-gija-jumulia-by-sridgwayWhen you inherit an IRA from someone other than your spouse, you are able to take advantage of certain protections or deferrals of tax inherent in the IRA, but you are somewhat restricted in your actions with the account.  These non-spouse rollover rules also apply to a spouse who has elected NOT to treat the inherited IRA as his own IRA.

Other than the trustee-to-trustee transfer, an inherited IRA is not permitted to be rolled over – in other words, a non-spouse rollover (the 60-day variety) is not allowed.


First of all, you are not allowed to treat the IRA as your own – in other words, the account can only be re-titled as an inherited IRA.  This means that you can move the account to another custodian (via trustee-to-trustee transfer only) or leave it at the same custodian, and change the title to read as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar.

In addition to the restriction on titling, the IRA beneficiary must begin taking Required Minimum Distributions (RMD) as described below:

  • If the owner of the account died on or after his Required Beginning Date, which is generally April 1 of the year following the year in which he reached age 70½, the RMD is based on the longer of: 1) the owner’s life expectancy¹; 2) the beneficiary’s life expectancy¹; 3) the oldest of multiple beneficiaries’ life expectancy¹ (if there are more than one beneficiary).
  • If the owner of the account died before his Required Beginning Date, the RMD is based upon the beneficiary’s life expectancy¹ or the life expectancy¹ of the oldest beneficiary if there are more than one beneficiary.

The Designated Beneficiary

The designated beneficiary is a specifically-named individual (or individuals, if more than one beneficiary is to inherit the account). The designated beneficiary is determined on September 30 of the year following the year of the death of the plan owner.  In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death).  If any person named in the plan documents as beneficiary but is no longer a beneficiary as of September 30 of the year following the year of death, that person will not be considered when determining the designated beneficiary.  This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

If an individual who is a beneficiary as of the owner’s date of death dies prior to September 30 of the year following the year of death, that individual is still considered to be the beneficiary, rather than any contingent beneficiaries.  The deceased beneficiary’s estate would receive the account and her age would be used for determining distribution.

Required Minimum Distribution (RMD) Rules

It is important to note, the following RMD rules apply:

  • you’re allowed to spread the distribution out in monthly, quarterly, or any schedule of payments as long as it’s at least annually;
  • if you’re the beneficiary of more than one IRA, you must determine the RMD and withdraw it from each inherited IRA individually; as well as
  • if you receive more than the minimum required in any one year, you do not receive “credit” against future distribution requirements.

Multiple Beneficiaries

If there are multiple beneficiaries of a single account, and all of the beneficiaries are individuals (not trusts), as indicated earlier, the beneficiary with the shortest life expectancy¹ is used to determine RMD for the account.  If an account is split into separate accounts with separate beneficiaries prior to the September 30 deadline in the year following the death of the owner, each account is treated separately with regard to inheritance rules, not aggregated.

Trust as a Beneficiary

If a trust is the named beneficiary, on September 30 of the year following the year of the death of the owner, the beneficiary(s) of the trust will become the designated beneficiary(s) of the IRA as long as the following are true:

  1. The trust is a valid trust under estate law, or would be but for the fact that there is no corpus.
  2. The trust is irrevocable or will become irrevocable by terms, upon the death of the owner.
  3. The beneficiary(s) of the trust are specifically identified from the trust document.
  4. The IRA custodian or trustee has received documentation of the trust by October 31 of the year following the year of the owner’s death.

If the beneficiary of the trust is another trust, as long as the second trust meets the requirements above, the beneficiary(s) of the second (or subsequent) trust will become the designated beneficiary(s) of the IRA. The four points above are a definition of a See-Through Trust (or Look-Through Trust), which is the only valid type of trust that can be a beneficiary of an IRA and allow the trust beneficiary(s) to defer distribution beyond the default five-year distribution period. 


¹ Life expectency is generally determined in these cases by the IRS Single Life Table, also known as Table I, which you can find by clicking this link.

Photo by sridgway

Divorcee Social Security Benefits

divorcee social securityThe below article is an excerpt from my new book Social Security for the Suddenly Single. This focused book is all about divorcee Social Security retirement and survivor benefits, and it’s available on Amazon. The book was written to address the lack of information about divorcee Social Security. You’ll find everything you need to know about divorcee Social Security retirement and survivor benefits within.

Divorcee Benefits Matrix

Below you will find a matrix that describes the various divorcee Social Security benefits you may have available to you.

To use this matrix, start at 1, choosing your birth year. Then move to 2 and choose the age you wish to learn about available benefits. Now choose your length of marriage (3), and your ex-spouse’s status (living or deceased) – 4. Lastly, choose the appropriate column for 5, whether or not you have a Child in Care under age 16.

Case: Bernadette

As an example, Bernadette was married to Robby for 17 years. Robby is still living, age 62, 2 years older than Bernadette. Robby has not begun collecting benefits at this point. The couple has no children, and they have been divorced for one year.

Bernadette is wondering about the earliest benefits she can receive from Social Security. She starts in column 1 with “Any Birth Year”, and then reviews the second column. At her present age of 60, she sees that while Robby is still living she is not eligible for any benefits.

So she looks to the next row in the Age column (2) – indicating age 62 to FRA. Since her Step 3 value is that the Marriage lasted 10 years or longer, Bernadette next checks step 4 – Robby is still living, and not presently collecting benefits. However, by the time Bernadette reaches age 62, it will have been two years since the divorce. Because of this, Bernadette sees that she is (between the ages of 62 and her FRA) eligible for the larger of the reduced Spousal Benefit or her own reduced benefit.

Bernadette would also like to estimate what her benefit would be if she waits until her FRA or later to apply for benefits. Knowing what she knows from the previous exercise, she would just move down the table to the appropriate Step 1 value. Her birth year is 1957 so she chooses the row “1954 or later”. This indicates that Bernadette will be eligible for the larger of her own benefit or the Spousal benefit – neither benefit is reduced since this estimate is assuming she’s either at or older than FRA.

Lastly, Bernadette would like to check on what benefits she might be eligible for upon Robby’s death. Moving to the right on the matrix to the set of columns indicating the ex-spouse is deceased, and since there is no Child in Care, Bernadette can review the various Survivor Benefit options that are available at various ages for her. At her present age (60) she would be eligible for a reduced Survivor Benefit if Robby were to die. At any age from 62 to FRA, she would be eligible for her choice of the reduced Survivor Benefit or her own reduced benefit. At or older than FRA, she has the same choice available, but neither benefit is reduced once she’s reached FRA or older.

divorcee social security


Creditor Protection for Retirement Plan Assets

In this day and age with bankruptcies on the rise, quite often this question comes up:  are my retirement plan assets protected from a creditor? And of course, there are two ways you can take this – are the assets protected from a creditor of my employer; and are the assets protected from my personal creditors?


Employer Creditors

Your vested qualified retirement plans (401(k), 403(b), etc.) are always protected from creditors, in the event that your company should declare bankruptcy. Vested retirement plans are your property (*upon distribution), not the property of the employer.  The same is true for vested traditional qualified pension plans.  However, with certain nonqualified retirement plans and non-vested plans or funds, there is a strong possibility that these assets could be accessed by your employer’s creditor in the event of a bankruptcy of the company.

The nonqualified plans are often called executive compensation, rabbi trust, deferred compensation, or supplemental retirement savings (among many other terms).  The key here is that these accounts are “non-qualified”, and as such are not protected by the ERISA law.  These accounts are very often open to access by creditors, so be aware of this if you’re a participant in such an account.  Check with your HR department if you’re unsure if your retirement account(s) are qualified (and thus protected by ERISA) or not.

IRAs, being individual accounts totally separate from your employer (unless you’re self-employed) are not considered in any way to be assets of your employer.  If you are self-employed and are not incorporated in some fashion, depending upon your state law, some of your IRA assets could be at risk, depending upon the state that you live in, and the balance of the account (see below).

Personal Creditors

In general, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) provides that both traditional and Roth IRAs derived from contributions are protected from creditors up to $1 million.  This protection only applies to bankruptcy, not to other judgments, and as such state law applies for all other situations. For example, your IRA is not protected against a judgment in the case of divorce, an IRS lien, or a criminal judgment against you.  The level of creditor protection varies widely by state.  For more up-to-date information on the protection within your state, click this link.  Rollover (including trustee-to-trustee transfer) amounts from employer plans, SEP or SIMPLE IRAs  maintain the original account’s ERISA protection from creditors.

There are cases, as illustrated recently in a case that was decided in 2007, where an inherited IRA with a revocable trust as the beneficiary became available to the decedent’s creditors.  This case was in the state of Kansas, so other states may have differing laws, this was just an example.  The way to resolve or avoid this is to use an irrevocable see-through trust as the beneficiary and use discretionary and spendthrift clauses within the trust as protection.  Otherwise, naming an individual (or individuals) as the IRA beneficiary(s) would avoid this problem as well.

Further problems develop in the inherited IRA spectrum due to the fact that most state courts do not consider an inherited IRA to be a “retirement account”, since the owner (the beneficiary of the decedent) is currently receiving an income from the account.  This is important because retirement accounts are specifically protected from creditors (due to BAPCPA).


Even though the IRA has somewhat fewer protections against creditors versus the employer plans, if you’ve left the employer this shouldn’t be the reason to leave funds in the old account.  An IRA account can be considerably more flexible, easier to access, and (likely) lower in cost overall. Rolled-over funds maintain ERISA protection, as well.

Photo by Hryck.

7 Mistakes With Stretch IRAs

exercise-stretch-discuss-by-filtranThe stretch IRA, when implemented properly, can be a great vehicle for transferring wealth to your heirs. Using this method, you pass along the tax-deferred status of the account until it is withdrawn, which may be much later.  The problem is that there are some very specific rules that must be followed in order to achieve the stretch IRA – and if you screw it up, there’s definitely not a do over in most of these cases.

Ground Rules

First, let’s run through the specifics that make up a stretch IRA.  When an IRA account owner dies, the beneficiary(s) are eligible to re-title (or transfer) the account(s) as inherited IRAs in the name of the deceased owner. At that point the beneficiary(s) must begin taking Required Minimum Distributions based upon the beneficiary’s age. This is much better (tax-wise) than having to take the entire sum all at once and pay tax on it, or the onerous five-year distribution rule that can come into effect if things aren’t done properly. (more on the specifics of the Stretch IRA can be found in this article.)

Keep in mind that these stretch IRA rules apply to both Traditional and Roth IRAs – because, even though Roth IRA owners are not subject to RMD, their beneficiaries are.

7 Mistakes

Here are some of the common mistakes that can be made when attempting to stretch an IRA:

  1. Not properly titling the account – There’s no remedy to this one, the account has to be titled as “John Doe IRA (Deceased January 1, 2009) FBO Janie Brown” or something very similar. If the account is set up in the name of a non-spouse beneficiary, the funds would be immediately taxable and the IRA would be distributed – all tax deferral is lost.
  2. Doing a “rollover” – While it may seem like a simple question of semantics, there is a technical difference between a direct trustee-to-trustee transfer and a rollover.  The trustee-to-trustee transfer is, as the name implies, a transfer directly between one trustee and another – the account owner never has possession of the funds. On the other hand, a rollover is when the beneficiary receives a payment made out in his own name, which he then deposits into an IRA.  A rollover is disallowed in attempting to set up a stretch IRA – you must always do a direct trustee-to-trustee transfer.
  3. Neglecting timely transfer – Sometimes estates can be tied up for years getting everything sorted out.  IRAs and 401(k) plans should not have this problem, as generally there is a specific beneficiary or beneficiaries designated on the account documentation. If the beneficiary is named on the account docs, the transfer to the beneficiary occurs outside of the testate process – no need to wait on the courts.  It is critical that the funds are transferred into a properly titled account before the end of the year following the year of the deceased owner’s death – otherwise the stretch IRA option is lost, and the funds will have to be paid out via the five year rule.
  4. Failing to take RMD for year of death – If the IRA owner dies after his Required Beginning Date (usually the year he reaches age 70½), a Required Minimum Distribution must be taken for the year of his death. This RMD cannot be included in a transfer to an inherited IRA, it must be received by the beneficiary (or estate) in cash.  This one can cause some hiccups, but in general can be resolved if caught in a timely fashion. If the RMD for the year of death was not taken in a timely manner, the beneficiary should take the distribution in the name of the decedent and pay the applicable penalties for excess accumulation.  If the amount is transferred to the inherited IRA and isn’t caught quickly, it could negate the stretch IRA altogether, potentially causing big tax headaches.
  5. Missing or neglecting RMD payments – If the beneficiary forgets to take the Required Minimum Distribution payment in a timely fashion, technically the five-year rule could kick in, requiring that the entire balance is paid out within five years rather than the beneficiary’s lifetime.  However, it is possible to recover from this mistake, according to the outcome of a Private Letter Ruling (PLR 200811028, 3/14/2008).  What happened in this case was that the beneficiary neglected to take two years’ worth of RMD, and then corrected her mistake in the third year, taking all three years’ worth of RMD, followed by paying the penalty (50%) on the missed two years.  The IRS ruled in this case that the failure to make these distributions in a timely fashion did not require that the five year rule apply.  Since she maintained the appropriate distributions, caught up on the “misses” and paid the penalties, she is allowed to continue stretching the IRA over her lifetime. Interestingly, this particular PLR is the first place where the stretch IRA was determined as the default rather than the five-year rule, breaking ground for this to be the case across the board, unless the plan’s provisions require the five-year rule.
  6. Not properly designating the beneficiary(s) on the account – IRS regulations state that the beneficiary must be identifiable in order to be eligible for the stretch IRA provision.  This means naming an individual or individuals as specific beneficiaries on the account forms, or designating a proper see through trust (with specific beneficiaries named) as the beneficiary.  The account form cannot have something ambiguous like “as stated in will” – since this does not name an identifiable beneficiary.  In addition, if the original IRA beneficiary is a trust and any beneficiary of the trust is not a person, then the stretch IRA provision is lost for all beneficiaries.
  7. Transferring the balance to a trust – if a qualified see-through trust is the beneficiary of the IRA, the balance of the funds in the IRA are NOT transferred to the trust. Rather, the IRA is transferred directly to a properly-titled inherited IRA, and then RMDs are taken from the inherited IRA and paid to the trust.  According to the trust’s provisions, the payments are then made to the trust beneficiary(s).  If the payments are simply passed through the trust to the trust beneficiary(s), then each beneficiary will be responsible for any tax on the distribution.  If the funds are accumulated in the trust, they are taxable to the trust as ordinary income.

Obviously this isn’t an exhaustive list, but rather a sampling of the more common errors that folks make when attempting to set up a stretch IRA. Done properly, this arrangement can turn an IRA of a sizeable amount in your lifetime into a very significant legacy to your heirs.  Proper setup is very important – get a professional to help you with it if you are confused by how this works!

Photo by filtran

A SIMPLE Kind of Plan

The SIMPLE Plan is a type of retirement account for small businesses that is simpler (ah hah!) to administer and more portable than the 401(k) plans that are more appopriate for larger businesses.  SIMPLE is an acronym (probably a backronym, more likely) which stands for Savings Incentive Match PLan for Employees.

A simple kind of planA SIMPLE typically is based on an IRA-type account, but could be based on a 401(k) plan. What we’ll cover here is the IRA-type of SIMPLE plan.  The difference (with the 401(k)-type) is that there are more restrictions on employer activities, and less room for error (as can be the case with 401(k) plans).

A SIMPLE Kind of Plan

Much like a regular 401(k) plan, a SIMPLE Plan is an agreement between the employer and employee where the employee agrees to a salary deferral.  This deferral effectively reduces the employee’s taxable take home pay, and the employer then contributes the deferred amount into the SIMPLE IRA account on behalf of the employee.  These contributions must be made to a SIMPLE IRA account, not a Traditional IRA.

To be eligible for a SIMPLE Plan, the employee must have received at least $5,000 in compensation during any two years (need not be consecutive) prior to the current tax year, and can reasonably expect to receive at least $5,000 in compensation in the current tax year (calendar year).  For the purposes of the SIMPLE Plan, a self-employed individual would be considered an employee if she received earned income as described (at least $5,000).

Also, certain classes of employees can be excluded from participation, such as union members subject to collective bargaining, or nonresident aliens who have received no compensation from US sources. The employer can have no more than 100 employees who are in the class that are allowed to participate in the SIMPLE plan.

No eligible employee may “opt out” of participation – however, eligible employees are not required to defer salary into the plan. This just means that they would have no deferral contributions or company matching contributions to the plan while they choose not to defer. Nonelective contributions by the employer would still be added to the account, regardless of whether the eligible employee defers salary for that year.

Types of Contributions

There are three different types of contributions that can be made to a SIMPLE Plan – salary deferrals, employer matches, and nonelective contributions.

Salary Deferrals are much the same as 401(k) salary deferrals.  The employee decides to defer a percentage of his salary, which reduces his taxable take-home pay, and the deferral is contributed to a SIMPLE IRA on his behalf.

Employer Matches are also similar to the same activity in a 401(k) plan.  The employer elects to match the employee contributions, dollar-for-dollar, up to 3% of the employee’s salary, although this amount can be less.  (see Limits below for additional information)

Nonelective Contributions – in some cases, the employer may decide to make contributions on behalf of ALL eligible employees, rather than only for those that are participating in the SIMPLE Plan.  In this case, the employer has opted for making the Nonelective Contributions instead of Employer Matching Contributions.  These Nonelective Contributions are for 2% of employee salary.


For Employer Matching contributions, the employer has some leeway in making the contributions for a particular tax year, but there are quite a few restrictions on how this leeway can be applied:

  • as described above, in general the matching contribution must be dollar-for-dollar up to 3% of the employee’s deferral for the year; however –
  • the matching contribution can be reduced to as little as 1% (or any amount between 1% and 3%) for a tax year as long as the amount is not reduced below 3% for more than two out of five tax years (including the current tax year) and the employees are informed in a timely fashion of the reduction in match.
  • the Nonelective Contribution of 2% can be substituted for the Employer Matching Contribution for any given year as long as employees are notified.

Contributions (for 2016-2018) are limited to $12,500 in employee deferrals, plus a catch up provision of $3,000 if the employee is age 50 or older during the tax year. (These figures are subject to annual adjustment due to inflation.)

Employer matches are limited to the amount the employee defers, up to 3%.

Note that SIMPLE deferral is counted toward the overall 401(k) limit ($18,000 for 2017; $18,500 for 2018; $24,000 and $24,500 respectively if over age 50) in deferrals for the tax year.  If an employee is subject to more than one retirement plan, this limit applies to all deferrals to 401(k)’s and SIMPLE plans for the tax year.


There are a few additional things of interest regarding rollovers and the SIMPLE plan that must be pointed out:

  • After you’ve had the SIMPLE IRA open for 2 or more years, you are allowed to rollover other IRA funds into a SIMPLE IRA. Before that, you are not allowed to rollover IRA or other accounts (besides another SIMPLE IRA) into your SIMPLE IRA.
  • In order to rollover amounts from your SIMPLE IRA into a Traditional IRA, the account must have been in existence for at least two years; otherwise your only option for a rollover is into another SIMPLE IRA (which then inherits the earlier SIMPLE IRAs starting date for rollover purposes).
  • The same two-year rule applies to Converting a SIMPLE IRA to a Roth IRA. There is no SIMPLE Roth IRA.
  • Early distributions (not subject to any of the exceptions) that occur during the first two years of the account’s existence are subject to a 25% additional penalty (instead of the usual 10% penalty for other IRA accounts).

Other than those restrictions, all of the other distribution rules apply to SIMPLE IRAs that apply to Traditional IRAs:  distributions are taxable as ordinary income; with some exceptions, qualified distributions can not begin until age 59½; rollovers and trustee-to-trustee transfers are allowed as non-taxable events (subject to the two year rule above); conversions to Roth IRAs are allowed without penalty (subject to the two-year rule); and early distributions not subject to exception are subject to an additional 10% penalty (25% in the first two years as described above).

(* a hodgepodge of additional stuff)

Contest for today:  The first person to leave a comment that explains why I used the particular picture above for this article will receive a pound of our delicious virtual back-bacon.  Extra points if you can mention something unique about that particular picture, as well.  Best of luck to all participants! (Canadians are welcome to guess this time as well!) :-)

Photo by Thomas Hill

Social Security Terms

social security termsAs you learn about Social Security and your possible benefits, there are several unique Social Security terms that you should understand. Below is a list and brief definitions of the most important of these Social Security terms.

Average Indexed Monthly Earnings (abbreviated as AIME) – this is the average of the highest 35 years of your lifetime earnings, indexed to inflation. Each year’s earnings is indexed based on when you reach age 60, and the highest 35 years are averaged. This average is divided by 12, to result in the monthly average. The AIME is used to determine your PIA. Your AIME can increase after age 62 if you’re continuing to work and earn in excess of some of your earlier indexed earnings amounts.

Bend Points – these two amounts are determined for each individual based upon the year that you will reach age 62. The Bend Points are applied to your AIME to calculate the PIA.

Delayed Retirement Credits (DRCs) – when you delay filing for benefits after your FRA, you accrue credits for the delay, known as a DRCs. You earn DRCs for delaying your filing for Social Security benefits after your FRA up to age 70 at maximum. No DRCs are earned after you reach age 70. Presently this delay credit is equal to 2/3% for each month of delay, or a total of 8% for each year of delay. These credits are accumulative – meaning that if you delay for 3 years your DRCs are 24%.

Full Retirement Age (FRA) – this is the age at which your Social Security benefit is equal to your PIA. The age is 66 for folks born between 1946 and 1954. FRA increases by 2 months for each birth year after 1954, up to a (current) maximum of 67 for those born in 1960 or later. For each month before this age that you file for benefits, your benefit will be reduced from the PIA amount; for each month after this age that you delay filing, your benefit is increased from the PIA amount.

Primary Insurance Amount (PIA) – Using the AIME, three amounts (bound by Bend Points) are applied to the average. The amount of your AIME up to the first Bend Point is multiplied by 90%; the amount of your AIME from the first Bend Point to the second Bend Point is multiplied by 32%; and the amount above the second Bend Point up to your total AIME is multiplied by 15%. These three amounts are added together to result in your PIA.

Social Security Bend Points Explained

i love deep blue by JennyHuangBend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series.  They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA. The points on the graph “bend” as the rate of inclusion changes.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA.  Here, however, we’ll go over how Bend Points are calculated each year.  To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis.  According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2018 bend points is from 2016.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085.  I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago.  At any rate, now that we know these two numbers, we can jump back to 2016’s AWI Series figure, which is $48,664.73.  It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2018’s bend points:

$48,664.73 / $9779.44 = 4.9762

4.9762 * $180 = $895.72, which is rounded up to $896 – the first bend point

4.9762 * $1,085 = $5,399.17, rounded down to $5,399 – the second bend point

And that’s all there is to it.  Hope this helps you understand the bend points a little better.

Photo by JennyHuang


big-cedar-tree-tiny-girl-by-woodleywonderworks1/1/2018 Note: Recharacterization of Roth conversion is no longer allowed as of tax year 2018. The last tax year that you could recharacterize Roth conversions is 2017. See Roth Recharacterization is No Longer Allowed for more details.

For IRA contributions, the concept is simple:  a certain amount may be contributed to the account each year, dependent upon the type of IRA and your MAGI (Modified Adjusted Gross Income).  But what if you find out that you are ineligible to contribute to a Roth IRA due to the MAGI limitation?  How about if you made contributions to a Trad IRA and, upon filing your taxes found out it would be in your best interest to put those funds in your Roth instead?  Enter the Recharacterizing.

Recharacterization of IRA Contributions

This is a relatively simple process, but, as with most things, the Code makes it seem like rocket surgery.  Essentially, if you make a contribution to one type of IRA and then decide that you’d rather have it in the other type of IRA, you can affect this recharacterization by:

  • notifying both trustees (the original IRA and the second IRA) of the transfer
  • requesting a trustee-to-trustee transfer
  • include in the transfer any net income attributable to the contributions being recharacterized
  • report the recharacterization on your tax return for the year (Form 8606)
  • treat the contribution to the second IRA as if made on the date of the contribution to the first IRA (in other words, as if you had done it the right way the first time)
  • if the first IRA was a Traditional IRA, you are not allowed a deduction for that contribution for the tax year (obviously, since it wasn’t left there)
  • All of this has to happen before the due date of your tax return, plus 6 months – for most calendar-year taxpayers this is October 15. (see Footnote below  for additional info)

Wrinkles with recharacterizing

Now, if you thought that was way too many steps to get something really simple accomplished, look at the following examples of additional confusion to add to the mix:

Conversion by Rollover from Traditional IRA (TIRA) to a Roth IRA (RIRA)… if you’re converting funds from your TIRA to a RIRA and the transfer occurs within two tax years (but still within the allowed 60 days)  you would treat the activity as having been completed before the end of the first tax year if you needed to later recharacterize the conversion.

Rollovers… if you’ve already made a tax-free transfer of the funds, in general those funds are not eligible to be recharacterized.

Recharacterizing Excess Contributions… since excess contributions must be removed prior to filing that tax return for the applicable tax year, any recharacterization of those amounts would have to be accomplished strictly by the due date of the return – no extra 6 months in this case.

Recharacterizing SEP or SIMPLE funds… if you’ve converted funds from a SEP-IRA or a SIMPLE IRA to a Roth IRA and wish to recharacterize those funds, they must go back to the type of IRA that they came from, either a SEP or a SIMPLE, and not a Traditional IRA.  But these can be new accounts if the old account was closed.

Mistaken Rollover to SEP or SIMPLE… if you mistakenly made a rollover transfer of Traditional IRA funds to a SEP or SIMPLE (which is not allowed), you can recharacterize those amounts back into a Traditional IRA.

Employer Contributions… it is not allowed to recharacterize employer contributions to a SEP or SIMPLE plan as contributions to another type of plan.

NOT a Rollover… when considering the “once a year” restriction on rollover transfers, recharacterization is not counted as a rollover, so roll away!

No Reconversions (within limits)… if you converted from a TIRA to a RIRA and the recharacterized the conversion, you cannot then re-convert those funds to the RIRA again in the same tax year, or within 30 days of the recharacterization (if after the end of the tax year).

Decedent… the election to recharacterize can be made on behalf of a deceased IRA owner by the executor, administrator, or other person responsible for the decedent’s final tax return.

So as you can see, there are lots of ways to complicate the process, but in general the act of recharacterization is pretty simple, as long as you follow the rules and pay attention to the dates.

Footnote: In this one case, the IRS allows additional time for completing the recharacterization activity even if you have not completed it by the prescribed dates.  There are some specific things that have to be accomplished in order to receive this extra time:

  • your return must have been filed on time
  • you must have done the following within 6 months of your filing date:
    • notify the trustees of the intent to recharacterize
    • provide trustees with all necessary information
    • request the transfer

Once complete, you must amend the return, write “Filed pursuant to section 301.9100-2” on the return, and refile with the recharacterization noted.  File the return at the same address as your original return.

Photo bywoodleywonderworks

Determining Your MAGI

Magi by Brian Whelan

There are income limits for contributing to an IRA (traditional and Roth), and below are links by filing status to illustrate the income limits in the situation where you are or are not covered by an employer-provided retirement plan, given your filing status.  This, along with your filing status and your Modified Adjusted Gross Income (MAGI) is an important factor in setting the limits for TIRAs, as there is the issue of deductibility at stake.

In order to fully understand the limitations, you also need to understand what makes up your Modified AGI (MAGI).  The MAGI is calculated as follows:

  1. Start with your Adjusted Gross Income (line 22, Form 1040A, or line 38, Form 1040).
  2. Add back in your IRA deduction amount (line 17 on Form 1040A or line 32 on Form 1040)
  3. Add back in your student loan interest (line 18 on Form 1040A or line 33 on Form 1040)
  4. Add back in any tuition and fees deductions from (line 19 on Form 1040A or line 34 on Form 1040)
  5. Add any domestic production activities from line 35 on Form 1040 (there is no line for this on 1040A)
  6. Add back any foreign earned income exclusions from line 18 of Form 2555EZ or line 45 of Form 2555.
  7. Add back any foreign housing deduction from line 50 of Form 2555
  8. Add back any excluded qualified savings bond interest shown on line 3, Schedule 1, Form 1040A, or line 3, Schedule B, Form 1040 (from line 14, Form 8815)
  9. Add back in any excluded employer-provided adoption benefits shown on line 30, Form 8839.

The total of these nine items listed above make up your Modified Adjusted Gross Income, or MAGI.

IRA Distribution Pro-Rata Rule

rata-tree-by-grahamanddairneIt is important to understand the Pro-Rata rule for IRAs – which comes into play when you have both deductible and after-tax contributions in your Traditional IRA account. As you take distributions from the account, each distribution is treated as partly taxable and partly non-taxable, in proportion of the after-tax contributions related to the overall account balance.

So How Does The Pro-Rata Rule Work?

For an example, let’s say you have a Traditional IRA (TIRA) with a balance of $100,000.  Over the years you made both deductible and after-tax contributions to this account… and your after-tax contributions amount to $25,000.  It’s not necessary to know the amount of the deductible contributions (for this exercise), just the after-tax contributions.

For this tax year, you’ve chosen to take distribution of $10,000 from your TIRA.  When  you prepare your tax return next year, you’ll include $7,500 in ordinary income, excluding the $2,500 which is the proportionate amount of your distribution representing your after-tax contributions.  In this example, one dollar out of every four is considered return of your after-tax contributions.

That’s pretty simple, right?  So why is this deemed worthy of a whole blog post?  Hold your horses, I’m about to tell you…

Why This Is Worthy Of A Whole Blog Post?

This is especially important when planning your Roth IRA conversions, among other distributions.  When you do a conversion, this is essentially a distribution from your TIRA, and as such you are liable for ordinary income tax on the taxable portion of your distribution.

This is one of the reasons that well-meaning financial advisors often recommend that, if you’re going to make non-deductible contributions to a TIRA with the intent to convert the account to a RIRA, you should make them to a completely separate account.  This way, (presumably) the only portion that would be taxable at the distribution (conversion) would the be the growth of the funds, such as capital appreciation and dividends.

Unfortunately, that’s not the way it works. The pro-rata rule takes into account the balance and makeup of ALL of your Traditional IRA accounts, not just the one that you’re taking a distribution from.

For example, Joe has $50,000 in one Traditional IRA account (from only pre-tax contributions). Joe’s income is too high for him to make Roth IRA contributions or deductible Traditional IRA contributions. He’s heard of the “back-door Roth IRA contribution” strategy, and would like to put this into play for his situation. Joe opens a new Traditional IRA and contributes $5,500 to the account. This contribution is non-deductible to Joe.

Now, following the back-door strategy, Joe converts his entire new IRA over to a Roth IRA. He thinks he has done this with no tax. But the problem is in the way the pro-rata rule works. Joe must pay tax on his conversion in proportion to the total of all of his IRA account balances, less the portion that is after-tax.

Adding his two IRAs together, he has a total of $55,500 in IRAs before the conversion. Of this, only 9.9% is after-tax contributions ($5,500 divided by $55,500). So of his converted $5,500, he must pay tax on $4,954.95 (90.1%). Plus, he still has $4,954.95 of non-deductible contributions that he must continue to keep track of as he makes future distributions from the account.

This can cause a lot of headache since there may be many years between the initial contribution and final distribution from the account. For each year that you have non-deductible contributions in your IRAs, you should track these contributions via IRS Form 8606, even if you have not taken any distributions for the year. This will keep your records up-to-date for when you do take distributions later on.

But I want to only convert the after-tax portion!

There is still a way to convert only the after-tax amounts to a Roth IRA, but there are some restrictions as well.

If you have access to a 401(k) plan or other employer-sponsored retirement plan (other than an IRA) that will accept rollover amounts (you’ll have to check this with your plan sponsor, some do not accept rollovers), you may be allowed to rollover the amount from your IRA that represents everything but your after-tax contributions.  Make sure you don’t accidentally rollover the post-tax (nondeductible) contributions, because that’s not allowed and you could get into dutch with the IRS and your 401k administrator if you do. However, if you can rollover everything but the non-deductible contributions, then you can convert the remainder amounts to your Roth IRA without a taxable event.  Pretty cool, huh?

It’s important to note that this only works for 401(k), 403(b) and other employer-sponsored retirement plans. You can’t rollover the excess above the non-deducted contributions to another IRA – you’d still be in the same boat as before.

All of these transactions can carry significant tax penalties if you make a mistake, so you need to be doubly sure that you’re doing it right before you make a move.  There are no “do overs” for these transactions (well, not without jumping through hoops or other places that you don’t want to consider).  Consult your tax advisor to make sure you’re doing it correctly if you’re not sure.

Photo by GrahamAndDairne

5 No-No’s for IRA Investing

prohibition-facts-by-sarahdeerIt is generally well-known that in an IRA account you have a wide range of investment choices. These choices are typically only limited by the custodian’s available investment options.  However, there are specific prohibited transactions that cannot be accomplished with IRA funds. Often these prohibited transactions can cause your IRA to be disqualified, which can result in significant tax and penalty, along with loss of the tax-favored status of the funds.

What’s Not Allowed for IRA Accounts?

  1. Self-Dealing.  You are not allowed, within your IRA, to make investments in property which benefits you or another disqualified person.  A disqualified person includes your fiduciary advisor and any member of your family, whether an ancestor, spouse, lineal descendant (child) or spouse of a lineal descendant.  It is important to note that this limit applies to both present and future use of a property. So if you purchased a condo and rented it out exclusively for several years and then decided to convert it to personal use, this act would disqualify the investment and potentially classify it as a distribution, to be taxed and penalized (with interest) retroactively.
  2. Borrowing.  You are not allowed to borrow funds from your IRA account.  Likewise, you are not allowed to put up your IRA account as collateral for a loan.
  3. Selling.  You are not allowed to personally sell property that you own outside of the IRA, to your IRA account.
  4. Collectibles.  The single class of investments that you may not invest in with your IRA account is collectibles.  This includes art, antiques, gems, coins, and alcoholic beverages, among other items.  There is an exception to the coin prohibition, in that you are allowed to invest in one, one-half, one-quarter, or one-tenth ounce U.S. gold coins, or one-ounce silver coins minted by the United States Treasury Department with your IRA funds (if your custodian allows). You can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion.
  5. Unreasonable Management Costs.  It is prohibited to pay an exorbitant amount to an advisor to manage your account.  This is due to the fact that it IS an allowed transaction to pay your advisor, tax-free, from your IRA specifically for managing the account.  If the amount is deemed unreasonable (e.g., obviously for services above and beyond managing the IRA account), this transaction is prohibited. An example of this is if you have both IRA and non-IRA funds with your advisor, but you pay the advisor’s entire fee strictly from your IRA account. Unless the non-IRA funds are an inconsequential amount, the fee paid from the IRA will be deemed exorbitant to the size of the IRA account.
  6. (bonus!) Life Insurance. You may not purchase life insurance contracts with your IRA account funds. This is a strict prohibition.

Beyond these transactions, IRAs have a pretty wide scope of available investment options. As I indicated before, your options are mostly limited by the custodian’s available investments.  In cases where the IRA funds are to be used for more unique investments, such as individual real estate transactions or gold bullion, a special custodian is often required.  These transactions can be very difficult to complete and manage over time and maintain the tax-qualified status.  If you’re interested in such a transaction, there is more information available in the article Where to Establish Your IRA Account.

Comprehensive Financial Planning – Explained

albert-and-the-puzzle-by-emdotFrom time to time, the question is asked of me: What exactly makes up a comprehensive financial planning engagement?  Since you know from reading about my practice that I operate in an hourly, fee-only fashion, you should know that a truly comprehensive financial planning engagement requires 10 to 15 hours of effort (or more) by the financial planner.

What exactly makes up a comprehensive financial planning engagement?

Each individual situation is going to be different, and so your mileage is likely to vary from my explanation.  What I’ll do, as a starting point, is list out the areas that are typically covered in what I’d call a comprehensive plan:

  • goal-setting – spending time understanding the wishes and desires of the client, and quantifying them in terms of time horizon and costs for use in planning; this can include retirement, college, home purchase or remodel, opening a business, parents moving in, and just about any major financial event
  • priority-setting – understanding the relative importance of each goal
  • risk analysis – explaining to the client the concepts of risk, how risk is required for return, and garnering an understanding of the tolerance level for risk given the timelines and current financial condition
  • cash flow – review of financial flows, finding those “unknown” expenditures that can be managed to help meet financial goals; understanding near-term and long-term requirements for cash flow; review of prior tax returns for any issues or overlooked opportunities
  • present financial condition – review of present accounts, allocation, future planned inflows into those accounts; present position with regard to debt, as well as future debt planned and how debt is to be retired
  • projection of future cash flows – modeling the future as it pertains to the goals stated, with regard to the present financial condition and assumptions made about holdings, inflows, taxes, debt, and timelines
  • risk management – review of current insurance coverage(s), especially with regard to life, disability, and long-term care insurance needs, both now and in the future, given results from the future cash flow projections; this often also entails a review of employer-provided benefits and recommendations for participation therein
  • estate planning – review of present accounts, ensuring appropriate titling and beneficiary designation both now and in the future, given results from other components of the planning process
  • strategy development – this can entail anything from tax planning to portfolio development to insurance recommendations, debt reduction plan, distribution planning, as well as opening and funding any new accounts deemed appropriate
  • communication of the results/recommendations – sometimes this takes a couple of hours or more on its own. The point is that the client comes away with a thorough understanding of the recommendations and the reasoning behind them; additionally, the client has an understanding of how to implement the recommendations
  • implementation – not always required, but often is requested. We spend time helping the client open accounts and making allocations if required, implementing any needed additional insurance coverage (reviewing policies and the like), implementing tax strategies, etc. – or sometimes the client turns the implementation completely over to us
  • follow up – plans are reviewed after approximately one year to ensure that circumstances have not changed dramatically (with regard to the information used in the original plan). If the client doesn’t wish to engage in formal follow up review, then the engagement is complete.

The Reality – What Really Is Involved

Now, given the fact that a typical comprehensive financial plan entails at least three meetings with the client, each lasting on average one and a half hours, that leaves five and a half hours (on the low end) or ten and a half hours (on the high end of my estimate) to cover the remainder of the activities I’ve listed. In the case of the lower end of the spectrum, some of the components are either eliminated or reduced in scope. For example, if the client only has a 401(k), no debt other than his mortgage, is single and has no children – then obviously the planning cycle is reduced, due to the reduction in planning factors.

Now, the other thing is that many financial planners (myself included) notoriously under-recover – that is, we often spend more time on the plan than what we bill, due to additional research required, or additional time required for communication of the recommendations, or any of a myriad of activities.

Hope this gives you an idea of what is involved in a typical financial planning engagement.

Taxpayer Bill of Rights – Do You Know Your Rights?

bill of rightsThere is a set of Rights that are available to all of us as taxpayers – the Taxpayer Bill of Rights. This group of basic rights is available to us so that the government (and specifically the Treasury Department and the IRS) don’t over-step their boundaries when dealing with taxpayers.

It’s important to know your rights, and those set forth in the Taxpayer Bill of Rights can be very helpful if you’re having trouble working with the government. The rights scattered throughout the Internal Revenue Code, but are published in total in IRS Publication 1, readily available on the internet to all taxpayers.

Recently the IRS published their Summertime Tax Tip 2017-21, which outlines the Taxpayer Bill of Rights. The text of the Tip follows below:

Know Your Taxpayer Bill of Rights

Every taxpayer has a set of fundamental rights and the IRS has an obligation to protect them. The “Taxpayer Bill of Rights” groups the taxpayer rights found in the tax code into 10 categories. Know these rights when interacting with the IRS. A good way to learn about them is by reading Publication 1, Your Rights as a Taxpayer.

Below are the descriptions of each right, as listed in Publication 1:

  1. The Right to Be Informed. Taxpayers have the right to know what to do in order to comply with the tax laws. They are entitled to clear explanations of the laws and IRS procedures on all tax forms, instructions, publications, notices and correspondence. They have the right to know about IRS decisions affecting their accounts and receive clear explanations of the outcomes.
  2. The Right to Quality Service. Taxpayers have the right to receive prompt, courteous and professional assistance in their interactions with the IRS. They also have the right to be spoken to in a way they can easily understand, to receive clear and easily understandable communications from the IRS, and to speak to a supervisor about inadequate service.
  3. The Right to Pay No More Than the Correct Amount of Tax. Taxpayers have the right to pay only the amount of tax legally due, including interest and penalties and to have the IRS apply all tax payments properly.
  4. The Right to Challenge the IRS’s Position and Be Heard. Taxpayers have the right to raise objections and provide additional documentation in response to formal IRS actions or proposed actions. They also have the right to expect the IRS to consider their timely objections promptly and fairly and to receive a response if the IRS does not agree with their position.
  5. The Right to Appeal an IRS Decision in an Independent Forum.Taxpayers are entitled to a fair and impartial administrative appeal of most IRS decisions, including many penalties and have the right to receive a written response regarding the Office of Appeals’ a decision. Taxpayers generally have the right to take their cases to court.
  6. The Right to Finality. Taxpayers have the right to know the maximum amount of time they have to challenge an IRS position as well as the amount of time the IRS has to audit a particular tax year or collect a tax debt. Taxpayers have the right to know when the IRS has finished an audit.
  7. The Right to Privacy. Taxpayers have the right to expect that any IRS inquiry, audit or enforcement action will comply with the law and be no more intrusive than necessary, and will respect all due process rights, including search and seizure protections and will provide, where applicable, a collection due process hearing.
  8. The Right to Confidentiality. Taxpayers have the right to expect that any information they provide to the IRS will not be disclosed unless authorized by the taxpayer or by law. Taxpayers have the right to expect appropriate action will be taken against employees, return preparers, and others who wrongfully use or disclose taxpayer return information.
  9. The Right to Retain Representation. Taxpayers have the right to retain an authorized representative of their choice to represent them in their dealings with the IRS. Taxpayers have the right to seek assistance from a Low Income Taxpayer Clinic if they cannot afford representation.
  10. The Right to a Fair and Just Tax System. Taxpayers have the right to expect the tax system to consider facts and circumstances that might affect their underlying liabilities, ability to pay, or ability to provide information timely. Taxpayers have the right to receive assistance from the Taxpayer Advocate Service if they are experiencing financial difficulty or if the IRS has not resolved their tax issues properly and timely through its normal channels.

The IRS will include Publication 1 when sending a taxpayer notices on a range of issues, such as an audit or collection matter. Publication 1 is available in English and Spanish. All IRS facilities will publicly display the rights for taxpayers.

Avoid scams. The IRS will never initiate contact using social media or text message. First contact generally comes in the mail. Those wondering if they owe money to the IRS can view their tax account information on to find out.

Additional IRS Resources:

IRS YouTube Videos:

Divorced with Children? Social Security Benefits for You

divorced with childrenThere are special rules that apply for Social Security benefits when you are divorced with children. While the ex-spouse is living, there is a discriminatory effect on benefits, but after the ex-spouse dies, a surviving ex-spouse with children under age 16 has one advantage over a surviving ex-spouse with no children. (The age of the child is not a factor if the child is permanently disabled and the disability began before age 22.)

During the life of your ex-spouse

Beth and Steve are divorced with children, three kids under age 16. Steve, age 62, started receiving Social Security benefits this year. As we know from this article on children’s benefits, all three of their children are eligible for Social Security benefits based on Steve’s record.

Plus, if they were still married, Beth would be eligible for a parent’s benefit based on Steve’s record as well. But since they’re divorced, a special rule applies to Beth’s situation. Being divorced, Beth is not eligible for the parent’s benefit that is otherwise available to a parent caring for a child (under age 16) of a Social Security recipient.

The parent’s benefit is only available to the current spouse of the Social Security recipient who is under Full Retirement Age. Ex-spouses are not at all eligible for this benefit.

This is the discriminatory effect for divorcees versus married folks. Although everything else is the same, this benefit is not available to Beth since they are divorced.

Once she’s reached age 62 Beth can be eligible for a regular ex-spouse benefit (as long as she and Steve were married for 10 years or more). If at least one of the children is still under age 16 at the point Beth reaches age 62 and she’s still unmarried (and Steve is still alive), Beth can be eligible for an unreduced Spousal Benefit from that point until Full Retirement Age, or when the child reaches age 16, whichever is earlier. Deemed filing will not apply to this situation – in other words, if Beth becomes ineligible (child reaches 16, or she remarries), Social Security benefits cease for her until she applies for another benefit type.

After the ex-spouse has died

Drawing out our example of Steve and Beth a bit further, let’s say Steve dies at the age of 63. As we know, since the kids are all under age 18, they are eligible for survivor benefits based on Steve’s record. Beth’s situation becomes more interesting with this development…

Beth is 49 at the time of Steve’s death. Since at least one of the children (of Steve and Beth) is under age 16, Beth is eligible for a surviving parent’s benefit. The advantage here is that the length of Beth and Steve’s marriage is not a requirement. In other words, for this surviving divorced parent’s benefit, the 10-year marriage length is not a factor.

The youngest child of Beth and Steve’s will reach age 16 when Beth is 60 years of age. Up to that point, Beth can continue to receive the parent’s benefit, regardless of the length of their marriage. However, if Beth remarries during this period, she will become ineligible for the parent’s benefit – it’s only available to her while she’s unmarried.

After the last child reaches age 16, Beth is no longer eligible for this surviving parent’s benefit. At this point, if their marriage did not last at least 10 years, Beth is not eligible for any benefits now or in the future based on Steve’s Social Security record. If the marriage lasted 10 or more years, Beth becomes eligible for a regular surviving ex-spouse benefit at age 60 – as long as she doesn’t remarry before age 60. After age 60, she’s still eligible for the survivor benefit.

The Earliest Age You Can Withdraw Retirement Money Without Penalty

numbersQuick – what’s the earliest age you can withdraw money from a retirement account without paying a penalty? Is it 59½?

Well, if that was your answer, you are probably in the majority. That’s the general overall rule regarding withdrawal of IRA and 401(k) money. And definitely, you should be able to withdraw money from your account after that age without penalty (unless it’s in a 401(k), you’re still employed, and your plan restricts in-plan distributions). But this is much later than the real answer.

If your answer was 55, you’re in an elite group. You know about the age 55 provision that provides the ability to withdraw 401(k) funds without penalty if you’ve left employment at or after age 55. This is a good answer, but the real answer using this provision is age 54. This is because the rule specifically states that you can take withdrawals penalty-free from your plan if you leave employment “during the calendar year that you will reach age 55”. So, technically, if your birthday is in December, you could leave employment as early as January of that year (at age 54 and one month) and still be eligible for penalty-free withdrawals from your 401(k) plan (but not an IRA). This is still much later than the real answer.

So, looking at the age 55 paragraph, you might guess age 50 if you’re a public safety employee – which you would immediately adjust to age 49. This is an even younger (and clever) answer, but still not the earliest age.

The real answer is that this is a trick question. If you meet one of the exceptions noted in either the 401(k) withdrawal exceptions or the IRA withdrawal exceptions articles, you can take a withdrawal at ANY AGE without penalty, as long as you are an eligible participant in the retirement account. Technically there is no minimum age at which you could take a penalty-free withdrawal from your retirement plan!

Where To Establish Your IRA Account

Establishing and contributing to an IRA (Traditional or Roth) is pretty simple and straightforward. There are many institutions where you can establish your IRA accounts:  banks, savings and loans, credit unions, insurance companies, mutual fund companies, and brokerages.  There are pros and cons to each type of institution, as we’ll list below.  These alternatives represent the major options for opening your IRA, in no particular order.

where to establish your IRA




Banks, Savings and Loans & Credit Unions

Banks are well-known as some of the most stable and conservative institutions in our financial industry.  For many folks, this is an assurance that there is additional safety in placing funds with these institutions, and in a way, with FDIC insurance, there is additional safety. This is mitigated quite a bit with the protections provided by law to IRA accounts. Since banks are conservative, until recently, their options for investment of IRAs were somewhat limited.  Traditionally, cash-oriented investments such as CDs and money market savings were the primary means of investment within banks.  This has changed lately with some deregulation of the banks, as many offer mutual fund investments in addition to the traditional offerings.
Insurance Companies While there are many arguments about the merits (or demerits) of placing annuity investments into IRAs, this is one of the options that insurance companies bring to the table.  Annuity investments can provide a stable guaranteed income stream for retirement. A Qualified Longevity Annuity Contract (QLAC) is one example of an annuity used in an IRA. Many times the products that insurance companies have to offer have significantly higher costs than can be found in other similar investment choices.  Annual expense ratios run in the 2% plus range. The increased expenses are used to pay for the unique features (longevity insurance, for example) of the insurance products.
Mutual Fund Companies Typically the lowest-cost providers of IRAs, with a wide variety of investment offerings.  In addition, once the account is established, there often are no transaction costs for additional contributions (if the investments are no-load).  This supports the concept of dollar-cost-averaging through low- or no-cost additions to the account. Many mutual funds have minimum investment levels that make investment into the funds difficult within the IRA. This is especially true in the early years of the account when the balance is smaller.  In addition, with the exception of no-load mutual funds, there can be sales charges associated with the funds, ranging anywhere from 2% up to 5% and more.
Brokerage Wide variety of investment choices. Depending upon the brokerage, can be a very cost effective option, in terms of transaction costs. Typically have a transaction cost with each contribution, which is in contention with the concept of dollar-cost averaging, as each individual contribution, if invested immediately, can generate a transaction fee ranging from $10 to $50, depending upon the brokerage.
Self-Directed IRA Custodian These custodians provide access to more specialized and unique investment choices, such as real estate, private offerings, and tax liens. The custodian provides expertise in the form of attorneys and other advisors to assist in the diverse selection of investments within the IRA in order to maintain the legal status of the deferred account. Generally the highest-cost option of all choices due to the additional back-office support. Due to the investment choices, may be very limited in flexibility.

As you can see, there are positives and negatives to each type of institution.  You need to be comfortable with your choice of financial institution to establish your IRA, as you will likely be dealing with the company for many years in the future.  Although you could make a change (rollover your funds) to a different institution at pretty much any time within limits, making those changes can be a hassle, so it’s best to use careful consideration in your choice.

Traveling for Charity? You may have deductions

traveling for charityMost of us realize that donating money and goods to a charity can be beneficial on our tax returns. But did you know that traveling for charity can also be deducted? It’s true – with some limitations, of course.

When you do work for a charity, whether building houses, manning a recruitment booth, or picking up items donated, travel may be required. If you use your own personal vehicle (or your company vehicle if you own the company) your travel involved with this work can often be deducted as well.

For example, you might volunteer at your church to help with the annual winter clothing drive. Your job is to visit the homes of donors to pick up the clothing for the drive, making the donation much simpler for folks who don’t have time to come down to the church. Your mileage for driving around to the donors’ homes can be counted as a deductible out of pocket expense on your tax return for the year.

A more involved example would be if you volunteer to help build a water filtration plant for a community in a third-world country, sponsored by a qualified charitable organization. Your out-of-pocket costs for airfare, lodging, and ground transportation can be deductible if those costs are strictly related to the charitable work, and the trip is predominantly associated with the work. That is to say, your trip is not a “vacation” with a small amount of time spent working for the charity – the trip should be about the charitable work first and foremost.

The IRS recently published a Summertime Tax Tip (2017-2) that gives some broad overview information on deducting expenses while traveling for charity. The text of the Tip follows below.

Tips to Keep in Mind for Taxpayers Traveling for Charity

During the summer, some taxpayers may travel because of their involvement with a qualified charity. These traveling taxpayers may be able to lower their taxes.

Here are some tax tips for taxpayers to use when deducting charity-related travel expenses:

  • Qualified Charities. For a taxpayer to deduct costs, they must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. A taxpayer should ask the group about its status before they donate. Taxpayers can also use the Select Check tool on to check a group’s status.
  • Out-of-Pocket Expenses.  A taxpayer may be able to deduct some of their costs including travel. These out-of-pocket expenses must be necessary while the taxpayer is away from home. All costs must be:
    • Unreimbursed,
    • Directly connected with the services,
    • Expenses the taxpayer had only because of the services the taxpayer gave, and
    • Not personal, living or family expenses.
  • Genuine and Substantial Duty. The charity work the taxpayer is involved with has to be real and substantial throughout the trip. The taxpayer can’t deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip.
  • Value of Time or Service.  A taxpayer can’t deduct the value of their time or services that they give to charity. This includes income lost while the taxpayer serves as an unpaid volunteer for a qualified charity.
  • Travel Expenses a Taxpayer Can Deduct. The types of expenses a taxpayer may be able to deduct include:
    • Air, rail and bus transportation,
    • Car expenses,
    • Lodging costs,
    • Cost of meals, and
    • Taxi or other transportation costs between the airport or station and their hotel.
  • Travel Expenses a Taxpayer Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, a taxpayer can’t deduct their costs if a significant part of the trip involves recreation or vacation.

For more on these rules, see Publication 526, Charitable Contributions. Get it on at any time.

%d bloggers like this: