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No Social Security COLA for 2016; Wage Base Unchanged as Well

Nov 11th, 2015
by jblankenship.
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no colaRecently the Social Security Administration announced that there would be no Cost of Living Adjustment (COLA) to recipients’ benefits for 2016.  This is the third time in 7 years that there has been no adjustment.  In 2010 and 2011 we saw the first ever zero COLA years since the automatic adjustment was first put in place in 1972. That dark period of time actually resulted in two years in a row with zero COLAs, after 38 years of increasing adjustments.

Why?

The Cost of Living Adjustment (COLA) is based upon the Consumer Price Index for Urban Wage Earners and Clerical Workers, or CPI-W.  If this factor increases year-over-year, then a COLA can be applied to Social Security benefits. This is an automatic adjustment, no action is required of Congress to produce the increase when there is one.  See How Social Security COLAs Are Calculated for details on the calculations.

When the COLA was being calculated for 2016 benefits, the CPI-W average for the third quarter of 2015 (233.278) actually decreased versus the third quarter 2014 average (234.242), a reduction of -0.41%.  So by definition there can be no increase for the coming year.  Depending upon how the average goes in the third quarter of 2016, there may or may not be a COLA increase for 2017. If the increase (assuming there is an increase) to the CPI-W is less than the decrease we saw for 2015, there will again be no COLA increase. If the increase is anything more than the 2015 decrease, there will be an automatic COLA increase for 2016.

Since the calculations (begun in 1972) thankfully did not provide for a reduction in benefits when the change in CPI-W was negative, any negative change must be overridden by increases before additional COLA increases will be factored in.  This is what happened in 2011 – even though we had an increase in the CPI-W from 2009 to 2010, the CPI-W was still a net negative from 2008 to 2010, and therefore there was no COLA for 2011.

Medicare Part B Impact

Medicare Part B premiums also increase regularly, albeit by a different scale.  The Part B increase is based on the cost of healthcare, which is different from the CPI-W.  As you may have read elsewhere, since there is no COLA increase for 2016 most (70%) of all folks paying this premium will not have to pay the increased amount, since the “hold harmless” clause requires that the net Social Security benefit received by most beneficiaries will not be decreased.

If you are not paying for your Medicare Part B premiums via withholding from your Social Security check, you will see an increase in your Medicare Part B premium – from $104.90 to $123.70 – which was a positive outcome from the BBA2015. Instead of the 52% increase originally calculated, this increase was limited to an increase of “only” 17.9% for 2016. Also, if you start Medicare in 2016, you’ll get to pay the brand-new increased Part B premium.

Wage Base and Earnings Limits Remain Unchanged as Well

In addition to the lack of an increase to benefits, the reduction in the CPI-W also resulted in a freeze of the Social Security taxable wage base. This is the amount of W2 or self employment income that is subject to Social Security taxation for the calendar year. In both 2015 and 2016 this wage base is $118,500. The last time this changed was from 2014 to 2015, when the wage base increased from $117,000 to the current $118,500.

A substantial earnings year (for the purpose of eliminating WEP) will also remain at the same level as 2015 – $22,050 for 2016.

Lastly, the Earnings Test limits for Social Security will also remain the same in 2016 as they have been for 2015. For folks who are receiving Social Security benefits that are younger than Full Retirement Age, the Earnings Test limit is $15,720, and $41,880 if you will reach age 66 in 2016.

 

Medicare Premium Part B Premium Increase for 2016

Nov 9th, 2015
by jblankenship.
3 comments

raising

Note: these numbers have been finalized for 2016 at slightly less than originally reported. Apologies for any confusion.

As we discussed in a previous post, with the lack of a Cost of Living Adjustment coming for Social Security recipients benefits in 2016, for most Medicare Part B participants the premium will remain unchanged at $104.90 in 2016.  However, approximately 30% of Part B participants will see an increase to their premium for 2016 – and originally this amount was going to be a 52% increase. Lost in all of the hullabaloo around the elimination of File & Suspend, a part of the Bipartisan Budget Act of 2015 helped to reduce that increase, which will be “only” 16% for 2016.

Instead of increasing to nearly $160 per month, the Medicare Part B premium will only increase to $121.80 per month for most of those affected. This change was taken care of in part by spreading the additional cost over the coming five years at a $3 per month surcharge for anyone who 1) starts Medicare between 2016 and 2021 and 2) anyone who is receiving Medicare Part B but paying the premiums directly rather than via withholding from Social Security.

Everyone gets to take part in some of the pain, though. Even though you may not see an increase to your monthly premium, your deductible is on the rise as a result of Medicare revenue shortfalls, but not as much as was originally expected. In addition to the premium increase for some recipients, all Medicare Part B recipients will experience an increase to the deductible. Originally this was to increase to $223 per year (from the current $147), but under BBA2015 the increase to the annual deductible was only $19, to a total deductible of $166 for 2016.

How may I be affected?

It depends on your income tax filing status, your household income on your tax return, and whether or not you’re receiving Social Security benefits and having your Part B premium deducted from the monthly check. (Incidentally, if you are receiving Social Security and are not having the Part B premium deducted but are paying directly, you should change this asap to avoid paying extra!)

If you’re delaying your Social Security benefits while paying your Part B premium directly, this increase will affect you. Plus, regardless of your Social Security filing status, if you’re in the upper income levels (see below) you’ll see an increase to your Part B premium (plus the $3 surcharge) as well.

The lowest Medicare Part B premium is found for folks who have an income of less than $85,000 (single) or $170,000 (married filing jointly). At income levels above that, the Part B premium increases.

The table below outlines the premium amounts for the various income levels and filing statuses:

 

 

Social Security Income Tax filing status 2016 Medicare Part B Premium
Single Joint
Receiving and Part B premium deducted Income $85,000 or less Income $170,000 or less $104.90
Receiving and Part B premium NOT deducted or not receiving Income $85,000 or less Income $170,000 or less $121.80*
Not applicable Income between than $85,001 and $107,000 Income between $170,001 and $214,000 $170.50*
Income between $107,001 and $160,000 Income between $214,001 and $320,000 $243.60*
Income between $160,001 and $214,000 Income between $320,001 and $428,000 $316.70*
Income $214,001 or more Income $428,001 or more $389.80*

* These premiums reflect the $3 surcharge on top of the regular Part B premium for each income level.

The Death of File & Suspend and Restricted Application

Nov 2nd, 2015
by jblankenship.
207 comments

deemed filing benchThe Bipartisan Budget Act of 2015’s Aftermath

Note: the original text had a placeholder date of May 3, 2016 as the final date for File & Suspend. This date has been finalized as April 30, 2016 and the text below corrected. — jb

With the passage of the Bipartisan Budget Act of 2015, an era of flexibility in Social Security claiming strategies comes to an end. Long gone is the ability for one spouse to delay benefits while the other collects benefits based on the first spouse’s record. Also gone is the option of collecting spousal benefits while delaying your own benefits to accrue the delay credits. We’ll go over the actual changes below, based upon your date of birth – because some of the provisions will remain for a while, and could be useful if you’re the right age.

Born in 1953 or earlier

If you were born in 1953 or earlier, that is, if you reach or reached your 62nd birthday in 2015 or before, some of the provisions are allowed for you as a “grandfathering” phase-in, albeit with some changes.

Suspending benefits – This option is still available to you, although there are some limits. If you’re already suspending your benefits or if you suspend your benefits before April 30, 2016, your suspension of benefits will continue to allow your spouse to collect Spousal Benefits while your own benefit accrues the delay credits. A child of yours under age 18 (or 19 if a full-time student in elementary or secondary school, or any age if disabled) can also collect benefits based on your record while your benefit is suspended.

In addition, if you’ve already suspended or will suspend by April 30, 2016, you will continue to have the option of changing your mind and receiving retroactive benefits to any point at or after your suspension date.

You will still have the option to suspend benefits at any point after April 30, 2016, but the treatment of your suspended benefits will be different. The new way suspended benefits works is that not only your own benefit is suspended, but also all benefits paid on your record are suspended as well. This means that if you suspend your benefits, your spouse and children will not be allowed to receive a benefit based on your record while your benefit is suspended.

Of course, since you must be at least at FRA to suspend benefits, this means that effectively this option is only available for persons who will reach age 66 on or before April 30, 2016 – so your birthdate must be April 30, 1950 or earlier to utilize File & Suspend in the old fashion. If born after April 30, 1950, the new suspend rules will apply to you (see below for more information).

Restricted Application – If your spouse has filed for benefits and you were born in 1953 or earlier, you may have the option of filing a restricted application for Spousal Benefits based on your spouse’s record, allowing you to delay receipt of your own retirement benefit to a later date. This is allowed based upon the fact that your spouse has filed – if your spouse has suspended receipt of benefits, the new suspend rules will apply unless the suspend was complete before April 30, 2016 as described above.

If your spouse was born in 1953 or earlier as well, he or she can still file a restricted application for Spousal Benefits upon reaching Full Retirement Age, allowing your spouse to collect the Spousal Benefit while delaying his or her own benefit to a later age as well. If your spouse was born in 1954 or later however, the new rules for deemed filing will apply, effectively eliminating the restricted application option (see below for more details).

Born in 1954 or later

This is where the biggest changes come in. File & Suspend is effectively eliminated for most strategies, and the expansion of the deeming rule eliminates the restricted application altogether for folks in this age group.

Suspend – You are still allowed to suspend benefits when you reach Full Retirement Age, but the suspension of benefits now applies not only to your own benefits but also to any benefits payable to your spouse or children.

You may start your benefits at any time at or after age 62 and suspend receipt of benefits at or after FRA. Your spouse and/or children may receive the auxiliary benefits during the period of time that you are actively receiving benefits, but if you suspend your benefits your dependents will also cease to receiving benefits until you restart your own benefits.

There are cases when this might make sense, such as if you have young children who could receive benefits for a period of time and then later you want to suspend to accrue additional delay credits (perhaps after the children have reached age 18).

Deemed Filing – in the past, deemed filing only applied if you were under Full Retirement Age. Not so under the new rules. If you were born in 1954 or later, when you file for any benefit you are deemed to file for all benefits for which you are eligible. This means that you cannot file a restricted application for spousal benefits in order to delay filing for your own benefit (an option under the old rules). Now, if you file for your own benefit or a Spousal Benefit, you have effectively filed for all benefits (if you’re eligible for additional benefits).

Effectively due to deemed filing, you will not be allowed to separate your benefits at any age if you’re eligible for more than one type of benefit.

So what is left?

After all the changes, are there any options left for filing strategies? Of course, but they’re definitely limited.

If you were born in 1953 or before, you have all of the same options available to you that you had before. However, you must act quickly if you were planning to implement a File & Suspend strategy, and this is only going to be available to you if you will have (or had) your 66th birthday on or before April 30, 2016 (you were born on or before April 30, 1950). If you fit this category, you can still File & Suspend and your dependents can receive benefits based on your record while your own benefit accrues the delay credits.

If you were born after April 30, 1950, you have the option (as outlined above) to suspend benefits at Full Retirement Age to accrue delay credits, but any dependent benefits (spousal or children’s) will also be suspended at that point until you re-file (unsuspend) your benefits.

A version of separating your own benefits from Spousal Benefits is available under the new rules, illustrated by the below example:

Jeffrey, age 60 is married to Pamela, age 59. Jeffrey’s projected Primary Insurance Amount (the amount he’ll receive when he reaches Full Retirement Age, which is 66 years, 4 months) is $2,200. Pamela’s PIA is projected as $1,000.

Pamela can file for her own benefit at age 62, which will result in her benefit being reduced to 72.5% of her PIA since her Full Retirement age is 66 years, 6 months. Her resulting benefit will be $725 per month. Since Jeffrey is at this point only 63 years of age and has not filed for his own benefit, Pamela is not eligible for a Spousal Benefit, so deemed filing does not apply to her.

Therefore, Pamela must (may?) wait until Jeffrey files for his retirement benefit before she files for the Spousal Benefit. If Jeffrey files for his own benefit at his Full Retirement Age (66 years, 4 months) or any time on or before Pamela reaches her FRA (66 years, 6 months), Pamela can then file for the unreduced Spousal “excess” Benefit to be added to her own reduced benefit.

The way the excess Spousal Benefit is calculated is to subtract Pamela’s PIA ($1,000) from 50% of Jeffrey’s PIA ($1,100), for a resulting excess Spousal Benefit of $100. If Pamela is at least at FRA this amount will be added to her reduced benefit for a total monthly benefit of $825.

If Pamela becomes eligible for the Spousal Benefit at any time before her FRA, the $100 excess benefit will be reduced, and then added to her benefit. So if, for example, Jeffrey files for his own benefit at his FRA (when Pamela is 65 years and 6 months old), her excess benefit will be 83.33% of the maximum, meaning:

Jeffrey’s PIA ($2,200) times 50% ($1,100) minus Pamela’s PIA ($1,000, resulting in $100) times 83.33% equals $83.33

Therefore, in this example we would take the reduced Spousal Benefit amount of $83.30 (rounded down) and add Pamela’s own reduced benefit of $725 for a total of $808.30.

There are other strategies available to be sure, and we’ll cover those in future articles. For now, just know that the landscape for benefit filing strategies is drastically limited from what we had available previously.

[graphiq id=”lmKpKnihBsh” title=”Social Security Beneficiaries” width=”600″ height=”514″ url=”https://w.graphiq.com/w/lmKpKnihBsh” link=”http://time-series.findthedata.com/l/56644/Social-Security-Beneficiaries” link_text=”Social Security Beneficiaries | FindTheData”]

Get some now, get more later

Oct 26th, 2015
by jblankenship.
11 comments

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

When you have reached Full Retirement Age (FRA – age 66 if you were born between 1946 and 1954), you have the option to file for Spousal Benefits separately from your own benefit. This is known as a restricted application – and is often referred to as “get some now, get more later ”. Of course, you must either be married to another Social Security recipient who has filed for benefits, or you have divorced after 10 years of marriage to someone who is at least 62 years of age. If divorced, either your ex must have filed for benefits or at least two years has passed since your divorce.

In order to get your Spousal Benefit now and then get more benefits later, you will need to file a restricted application for spousal benefits when you have reached Full Retirement Age. Typically you should file for this benefit a few months in advance (SSA says up to 3 months in advance) and instruct them to begin your Spousal Benefit when you reach FRA.

An important factor in this process is that you have not filed for any benefits previous to the restricted application. That means you could not have filed for your own benefit earlier. In addition, if you were receiving SSDI (Social Security Disability Income) up to Full Retirement Age, this option is also not available to you.

Do Not File and Suspend

You also would not file and suspend. For some reason, many folks get this confused, thinking that they need to file and suspend and then file a restricted application. If you file and suspend, that takes away your option to file a restricted application – since one of the requirements for a restricted application is that you have not filed for benefits previously. Even though you would not be receiving benefits (having suspended) the action of file and suspend is actually filing for your own benefits. Therefore, if you file and suspend, you are not allowed to file a restricted application for spousal benefits.

Probably the reason for the confusion is that many times if both spouses of a married couple are wishing to delay benefits to age 70, in order for one member of the couple to file a restricted application for spousal benefits, the OTHER member of the couple may need to file and suspend.

In the case of a divorced couple, there is no need for file and suspend at all if the divorce was finalized at least two years ago. This is known as independent entitlement to spousal benefits, and so no one would need to file and suspend to allow for a restricted application for either member of the former couple.

Lissette wants to delay her own benefit as long as possible. She is reaching Full Retirement Age soon, and has been divorced for more than two years after her marriage. In order to take advantage of the “get some now, get more later ” option, when Lissette reaches FRA, she will file a restricted application for spousal benefits. As is often the case with a divorced individual, Lissette visits her local SSA office and brings along the documentation of her marriage, divorce, and her ex-husband’s Social Security number. With this information, Lissette can file a restricted application for Spousal Benefits.

Later, when Lissette reaches age 70, she can file for her own benefits, which will have maximized due to the delay credits adding 32% to her PIA.

Your Spouse Will File and Suspend

On the other hand, Carol, age 65 is looking forward to using the “get some now, get more later ” option when she reaches age 66, her Full Retirement Age. Ronald, her husband, is reaching his FRA of age 66 3 months after Carol. Ronald also wants to delay his benefit to maximize it at age 70.

When Carol reaches age 66, since Ronald has not yet filed for any benefits, she is not yet eligible for the restricted application. If she filed for benefits now, that would take away her option to file a restricted application when Ronald has filed for his benefits. She also would NOT file and suspend – as explained earlier, this would eliminate her option to file a restricted application.

So three months after Carol’s 66th birthday, when Ronald reaches FRA, Ronald files and suspends his benefit – he doesn’t want to receive the benefit now, he wants to delay as long as possible. He only files and suspends now in order to allow Carol to file a restricted application. Since Ronald has filed (file & suspend) Carol is now allowed to file a restricted application for spousal benefits.

It could have gone the other way – Carol could have filed and suspended at her FRA and then 3 months later Ronald could have filed a restricted application for Spousal Benefits. But this wouldn’t have worked out as well since Ronald’s PIA is $2,200 and Carol’s is $1,500. The Spousal Benefit for Carol (based on Ronald’s record) is $1,100; if they did it the other way the Spousal Benefit for Ronald (based on Carol’s record) would only have been $750.

[graphiq id=”3GQQ2SZjuE5″ title=”Average Social Security Payout per Month” width=”600″ height=”520″ url=”https://w.graphiq.com/w/3GQQ2SZjuE5″ link=”http://time-series.findthedata.com/l/56643/Average-Social-Security-Payout-per-Month” link_text=”Average Social Security Payout per Month | FindTheData”]

SOSEPP – Fixed Annuitization method

Oct 19th, 2015
by jblankenship.
1 comment
sosepp

Photo credit: coop

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Annuitization method.

Calculating your annual payment under this method requires you to have the balance of your IRA or 401(k) account and an annuity factor, which is found in Appendix B of Rev. Ruling 2002-62 using the age you have reached (or will reach) for that calendar year. You will then specify a rate of interest of your choice that is not more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Once you’ve calculated your annual payment under the Fixed Annuitization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.

SOSEPP – Fixed Amortization Method

Oct 19th, 2015
by jblankenship.
1 comment
amortized berries

Photo credit: malomar

When calculating your Series of Substantially Equal Periodic Payments (SOSEPP), provided for under §72(t)(2)(A)(iv) of the Internal Revenue Code, one of your choices is the Fixed Amortization method.

Calculating your annual payment under this method requires you to have the balance of your IRA account. With this balance you then create an amortization schedule over a specified number of years equal to your life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) for that calendar year. The amortization table must use a rate of interest of your choice, but the chosen rate cannot be more than 120% of the federal mid-term rate published by regularly the IRS in an Internal Revenue Bulletin (IRB).

Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than 10 years younger than you, you will use the Single Life Expectancy table. If you are married and your spouse is 10 years or more younger, you may choose to use the Joint Life and Last Survivor Expectancy table.

Once you’ve calculated your annual payment under the Fixed Amortization method, your future payments will be exactly the same until the SOSEPP is no longer in effect. There is a one-time opportunity to change to the Required Minimum Distribution method.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.

SOSEPP – RMD Method

Oct 19th, 2015
by jblankenship.
1 comment
minimum

Photo credit: jb

The Required Minimum Distribution method for calculating your Series of Substantially Equal Periodic Payments (under §72(t)(2)(A)(iv)) calculates the specific amount that you must withdraw from your IRA, 401k, or other retirement plan each year, based upon your account balance at the end of the previous year. The balance is then divided by the life expectancy factor from either the Single Life Expectancy table or the Joint Life and Last Survivor Expectancy table, using the age(s) you have reached (or will reach) by the end of the current calendar year. This annual amount will be different each year, since the balance at the end of the previous year will be different, and your age factor will be different as well.

Which table you use is based upon your circumstances. If you are single, or married and your spouse is less than 10 years younger than you, you will use the Single Life Expectancy table. If you are married and your spouse is 10 years or more younger, you may choose to use the Joint Life and Last Survivor Expectancy table.

For more details on the Series of Substantially Equal Periodic Payments (SOSEPP) see Early Withdrawal of an IRA or 401(k) – SOSEPP.

Early Withdrawal of an IRA or 401(k) – SOSEPP

Oct 19th, 2015
by jblankenship.
6 comments

Photo credit: malomar

This particular section of the Internal Revenue Code – specifically §72(t)(2)(A)(iv) – is the most famous of the 72(t) provisions. This is mostly due to the fact that it seems to be the ultimate answer to the age-old question “How can I take money out of my IRA or 401(k) without penalty?”

While it’s true that this particular code section provides a method for getting at your retirement funds without penalty (and without special circumstances like first-time home purchase or medical issues), this code section is very complicated. With this complication comes a huge potential for costly mistakes – and the IRS does NOT forgive and forget!

A Series of Substantially Equal Periodic Payments, or SOSEPP is just what it sounds like. You withdraw a specified amount from your IRA or 401(k) every year. The specified amount is not always the same (hence “substantially” equal) but the method for determining the amount is the same year after year. You start your SOSEPP at some age before 59 ½ years of age (or the age that you would otherwise qualify for penalty-free withdrawals), and you must continue those payments for the greater of 5 years or until you reach age 59 ½.

In order to set up your Series of Substantially Equal Periodic Payments (SOSEPP), you must use one of the three methods prescribed by the IRS: Required Minimum Distribution method, Fixed Amortization method, and Fixed Annuitization method (follow the links for more information on each method).

Once chosen, your method can not be changed under most circumstances. There is one situation that provides for a one-time change to your payments, but otherwise the SOSEPP can’t be changed without “busting” the activity. This means that every year the SOSEPP is in effect, you must take exactly the amount in your schedule from your retirement account, no more and no less. Making a change to your withdrawal schedule will result in your owing the 10% penalty retroactively on all payments received to that point, plus interest (this is where the IRS does not forgive).

In addition, once you’ve begun your SOSEPP, you must continue that payment schedule until the later of five years or you reach age 59 ½. Again, this is an area where the IRS doesn’t forgive or give any leeway: if you take additional distributions one day before your five years or 59 ½th birthday, the action will “bust” the SOSEPP, and you’ll be liable for 10% penalty on all distributions from your IRA plus penalties. Obviously this sort of an arrangement should not be taken lightly, and you must keep excellent, flawless records on your withdrawals.

Other facts about SOSEPP:

  • You can split your IRA into more than one account, and apply your SOSEPP against only one account, thereby reducing the balance against which your payout method is calculated. This splitting typically is not available for a 401(k) plan, although you could rollover a portion of the 401(k) to an IRA and use a SOSEPP against either account, as long as the plan administrator allows.
  • You can have more than one SOSEPP going at a time, using separate IRA or 401(k) accounts and different payout methods for each.
  • Your periodic payment will likely change under the minimum distribution method, as it recalculates annually based on the account balance at the end of the prior year.

The 52% Medicare Premium Increase by the Numbers

Oct 14th, 2015
by jblankenship.
9 comments

increaseBy now if you’re a Medicare recipient I’m sure you’ve heard all about the potential 52% Medicare Premium increase coming in 2016 for some recipients. This is due to a virtually-unknown (until recently) part of the law that allows no increase to Medicare premiums if there is no COLA adjustment to Social Security benefits being currently received. This happened in 2010 and 2011 when there was no COLA added for Social Security recipients – it just wasn’t the headline grabbing 52% number.

As a result of this lack of increase for 70% of all Medicare Part B recipients, all other Medicare Part B premium payers must pick up the slack. The increase to premium is projected to be a maximum of 52% – from $104.90 to $159.40.

Who is impacted?

Primarily only those people who are over age 65, receiving Part B Medicare coverage and who are not currently receiving Social Security benefits will be impacted. Anyone who is currently receiving Social Security and having the Part B premium deducted from their check will have the same premium for 2016 as they have in 2015, since there is no COLA projected. (Note: If you’re receiving Social Security and NOT having the Part B premium deducted from your check, you’re also going to be impacted – you should change this right away to avoid the unnecessary increase!)

Many people have delayed receipt of Social Security benefits past age 65 in order to maximize the Social Security benefits that they’ll eventually receive. Delaying from age 65 to age 66 will result in an increase of benefits by 7.14% for most recipients. Delaying beyond age 66 will result in an increase to benefits of 8% for each year of delay.

Dave is reaching age 65 right now, but has always intended to delay his Social Security benefit to at least age 66. The decision of whether to start taking benefits now (to avoid the 52% premium increase!) versus delaying becomes a matter of running the numbers.

This $54.50 increase is made up completely if Dave’s benefit would have been $763.30 per month or more at age 65. For any higher benefit, the result is that much better.

For another example, Greta, who is reaching age 70 late next year and has not started receiving Social Security would only consider filing for benefits now if her age 66 benefit (the benefit against which the delay increases are calculated) would have been less than $681.25. If Greta’s age 66 benefit was, for example, $700 per month, delaying for another year to her age 70 would result in an additional increase of $56 per month – more than the Medicare increase.

Lastly, if you’re nearing (within a few months) of a milestone that you intended to file for benefits –such as if you intended to file in January – you might consider filing early now if it’s that important to you. In the long run the delay of a few months would not have a large impact (three months would be an increase of 2%) and if it helps you to sleep at night then all the better. I’d still counsel that the 2% extra is worth enduring the increase to the Medicare Premium though – especially if you’ve delayed this long in order to maximize benefits for yourself and perhaps for a younger spouse’s future survivor benefits.

Effect Is Temporary

The last thing to keep in mind with all of this is that the effect of this Medicare Part B premium increase are temporary. After COLAs are again added to Social Security benefits, the Medicare premiums will even out again. That’s how it happened after the non-increases of 2010 and 2011: in 2010 for some folks the Medicare premium increased from $96.40 to $110.50, and in 2011 for some folks it increased again to $115.40 (19.71% in all!). In 2012, when COLAs were once again included for Social Security benefits, everyone’s Medicare Part B premium fell back to $99.90 a month (except for the folks in higher tax brackets, which is an entirely separate set of numbers to consider).

Now is the time to act though – because to avoid the increase your benefit must have started in November or earlier. Start in December and you’ll get the premium increase anyway.

Separation From Service On or After Age 55

Oct 12th, 2015
by jblankenship.
1 comment

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

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after 55

Photo credit: jb

Did you realize that there is a provision within the Internal Revenue Code that allows you to start taking distributions from your 401(k) plan before you reach age 59½?  This little-known section of the code, §72(t)(2)(A)(v), can be a real dandy if you happen to fit the requirements. The primary requirement is that you separate from service with the employer at or after age 55.

Note: although we will refer to the 401(k) throughout this article, this code provision applies to all ERISA-qualified, employer-established defined contribution plans, which includes 401(k), 403(b), 501(a), and others.

Here’s how it works:  if you are working for a company and are participating in the company’s 401(k) plan, should you leave employment with that company at any time during or after the year in which you reach age 55, there will be no penalty for taking distributions from the plan.  Normally, any distribution (other than specifically-qualified distributions) prior to age 59½ will result in the 10% penalty being applied, in addition to regular income tax.

It is important to note that these distributions only qualify when received from a company-established defined contribution plan – NOT an IRA account.  Just to be clear:

THIS PROVISION DOES NOT APPLY TO IRA ACCOUNTS.

In order to maintain this penalty-free distribution, the funds must not be rolled over into an IRA.  This is a critical distinction that you need to understand – a mistake would take away this option completely.  Be certain that you completely understand how this works before starting a distribution, as it could be costly to make a mistake.

Lastly, the Pension Protection Act of 2006 made one additional change to the code:  The age limit is reduced to 50 for retiring police, firefighters, and medics. Retirees from those specific jobs can take a penalty-free distribution from their accounts when they leave employment at or after age 50.

As with all defined contribution plans, normal income taxes will still apply.

Read about the potential Downside to the Age 55 Rule for 401k Plans.

Book Review – Choose Your Retirement

Oct 7th, 2015
by jblankenship.
2 comments

choose your retirementThe latest book by Emily Guy Birken – Choose Your Retirement – is unlike any other book I’ve read on the subject. Birken takes the time to walk the reader through all of the decision-points that likely will confront you. She spends time acknowledging all of the factors that often face future retirees, including all of the emotional factors that plague us.

Author Birken, who you may recognize from her many writing gigs with well-known personal finance outlets including Wisebread, PT Money, Money Crashers and Yahoo! Finance, has really done well with this book, in my opinion. The book provides practical step-by-step guidance and counsel for navigating the internal mental scripts that different personality types face when saving – Money Avoidance, Money Worship, Money Status, and Money Vigilance. Most everyone fits into one of these categories – and each category has it’s own pitfalls and benefits. This book takes you through each script type to help you understand the barriers that you are likely facing as you plan for and approach retirement.

In Part II Emily takes time to work through debunking the common myths that pervade the retirement planning landscape.  Among the topics here are myths about how to estimate how much money you’ll need in retirement, as well as myths about Social Security, Medicare and healthcare.

The last section of the book is where the rubber meets the road. The author covers in ten chapters some of the very important topics that most retirement books leave behind, including things like retiring abroad or retiring in place (where you live now), changing careers in retirement (because retirement doesn’t mean stop!), and leaving a legacy.

The last section of the book is in my opinion what really sets this book apart from the field. These categories are covered in-depth, with practical advice for things that you don’t typically see in a retirement book. Ms. Birken does a great job with this part of the book – like, for example, the concept of undertaking more education in retirement. Did you know you can use a 529 plan to fund your own education on a tax-advantaged basis?

All in all, I think Emily, who I am privileged to have met and spent some time with at a recent FinCon conference, has really done a great job with this book. It’s also an excellent complement to her first book, The 5 Years Before You Retire. I recommend this book for any and all who are looking to retire soon, it’s a practical book with worksheets built in, and you’ll earn back your investment quickly with the sage advice.

Beyond – Beyond 401k and IRA

Oct 5th, 2015
by jblankenship.
7 comments

beyond-beyondAs a follow up to my post last week Beyond 401k and IRA, I discovered this week that I had neglected to point out a relatively new option that is very well worth considering.

This option was brought to my attention by my friend and colleague (and fellow GPN member) Lisa Weil of Clarity Northwest Wealth Management in Seattle, WA: as of late last year with the issuance of IRS Notice 2014-54, there is the option of over-funding your 401k with after-tax dollars, and then rolling over those monies to a Roth IRA when you leave employment.

The way it works is that after you max out your regular deducted 401k contributions, plus your company provided the matching funds, there is usually quite a bit of headroom available within the annual funding limits. You can (if your 401k administrator allows) make after-tax contributions to your 401k up to the limit of $53,000. This limit includes the “regular” contributions of $18,000 and your employer matching dollars. If you’re over age 50 the limit is $59,000 due to the catch-up.

When you leave employment, you can rollover your pre-tax contributions, employer contributions, and the growth in the account to a traditional IRA; THEN, you can take these after-tax contributions and rollover to a Roth IRA. Sort of a super-charged Roth IRA contribution method.

This is an excellent place to put your additional savings dollars after you’ve maxed out all of the other options. You need to be careful about the rollover when you retire, and your plan administrator also has to allow these after-tax contributions. If the administrator doesn’t currently allow the extra contributions, the plan can be amended to allow the extra contributions.

I applaud Lisa for pointing this out – and it shows once again that the rules for retirement plan contributions are complicated and constantly changing, and it pays to question everything as you go. I wrote about the change with Notice 2014-54 late last year in the article A New Way to Fund Your Roth IRA – and had forgotten about it when I wrote the article last week.

Thanks again, Lisa!

Identity Theft Protection

Sep 23rd, 2015
by jblankenship.
3 comments
identity-dumpster-dive

Photo credit: jb

Whether they’re snatching your purse, diving into your dumpster, stealing your mail, or hacking into your computer, they’re out to get you. Who are they? Identity thieves.

Identity thieves can empty your bank account, max out your credit cards, open new accounts in your name, and purchase furniture, cars, and even homes on the basis of your credit history. What if they give your personal information to the police during an arrest and then don’t show up for a court date? You could be arrested and jailed.

And what will you get for their efforts? You’ll get the headache and expense of cleaning up the mess they leave behind. Not to mention the potential loss of money, even jobs, that goes along with this problem.

You may never be able to completely prevent your identity from being stolen, but here are some steps you can take to help protect yourself from becoming a victim.

Check Yourself Out

It’s important to review your credit report periodically. Check to make sure that all the information contained in it is correct, and be on the lookout for any fraudulent activity.

You may get your credit report for free once a year, from each of the three national credit reporting agencies. To do so, contact the Annual Credit Report Request Service online at www.annualcreditreport.com or call (877) 322-8228.

It’s important to use www.annualcreditreport.com – this is the FREE service that allows you to get your report(s) once per year from each agency. Other services claim to provide this service for free but you usually wind up paying something for it, possibly without even knowing. Be careful as you use these services – they offer many “pay” options such as credit monitoring, credit scores, and the like. Most of this you can live without. Just stick with the free report and review it carefully for any incorrect information or entries that appear to be fraudulent.

If you need to correct any information or dispute any entries, contact the three national credit reporting agencies:

Secure Your Number

Your most critical personal identifier is your Social Security number (SSN). Guard it carefully. Never carry your Social Security card with you unless you need it for a specific purpose (such as applying for a passport or driver’s license). The same goes for other forms of identification (such as health insurance cards) that include your SSN. Don’t have your SSN pre-printed on your checks, and don’t let merchants write it on your checks. Don’t give it out over the phone unless you initiated the call and it is to an organization that you trust. Ask the three major credit reporting agencies to truncate your SSN on your credit reports. Try to avoid listing it (where possible) on employment applications; offer instead to provide it during your interview.

Don’t Leave Home With It

Many of us carry our checkbooks and all of our credit cards, debit cards, and other cards with us all the time. That’s a bad idea – if your wallet or purse is stolen, the thief will have a treasure chest of new toys to play with.

Carry only the cards and/or checks you’ll need for any one trip. And keep a written record of all your account numbers, credit card expiration dates, and the telephone numbers of the customer service and fraud departments in a secure place – at home. It may be useful to make a photocopy (or as I do, a computer-scanned image) of all of your credit cards, driver’s license, insurance cards, etc., and keep those images in a safe place where you can get to them quickly in the event that your cards are stolen.

In addition, using a smart-phone application may be handy, but make sure that you have good security on your phone – no using “1234” as your passcode, for example.

Keep Your Receipts

When you make a purchase with a credit or debit card, you’re given a receipt. Don’t throw it away or leave it behind – it may contain your credit card number (this is much more rare these days), plus it is your sole defense in the event of fraud within the store. And don’t leave it in the shopping bag inside your car while you continue shopping either; if your car is broken into and the item you bought is stolen, your identity could be stolen as well.

Save your receipts until you can check them against your monthly statements, and watch your statements for purchases you didn’t make, or for amounts that don’t match. When you’re finished matching them, shred them!

When You Toss It, Shred It

Before you throw out any financial records such as credit or debit card receipts and statements, canceled checks, or even offers for credit cards you receive in the mail – shred the documents, preferably in a cross-cut shredder. If you don’t, you may find that the panhandler going through your dumpster was looking for more than just discarded leftovers. These cross-cut shredders are very affordable (starting around $50) and available at most discount stores and office supply outlets.

Keep A Low Profile

The more your personal information is available to others, the more likely you are to be victimized by identity theft. While you don’t need to become a hermit in a cave, there are steps you can take to help minimize your exposure:

  • to stop telephone calls from national telemarketers, list your telephone number with the FTC’s National Do Not Call Registry by registering online at www.donotcall.gov
  • to remove your name from most national mailing and e-mailing lists, as well as most telemarketing lists involving credit or insurance, register online at www.optoutprescreen.com
  • when given the opportunity to do so by your bank, investment firm, insurance company, and credit card companies, opt out of allowing them to share your financial information with other organizations.
  • You may even want to consider having your name and address removed from the telephone book and reverse directories. This is becoming more of a reality for everyone these days as landlines go the way of the buggy-whip.

Take a Bite Out Of Crime

Whatever else you may want your computer to do, you don’t want it to inadvertently reveal your personal information to others. Take steps to help assure that this won’t happen.

Install a firewall to prevent hackers from obtaining information from your hard drive or hijacking your computer to use it for committing other crimes. This is especially important any more since we nearly all use a high-speed connection that leaves you continuously connected to the internet, such as cable or DSL. Moreover, install virus protection software and update it on a regular basis as well.

Try to avoid storing personal and financial information on a laptop; if it’s stolen, the thief may obtain much more than the value of your computer. If you must store such information on your laptop, make things as difficult as possible for a thief by protecting these files with a strong password – one that’s at least eight characters long, and that contains uppercase and lowercase letters, as well as numbers and symbols.

“If a stranger calls, don’t answer.” Opening emails from people you don’t know, especially if you download attached files or click on hyperlinks in the message, can expose you to viruses, infect your computer with “spyware” or “malware” – software that captures information by recording your keystrokes – or lead you to “spoof” websites (websites that impersonate legitimate business sites) designed to trick you into revealing personal information that can be used to steal your identity.

If you wish to visit a business’s legitimate website, use your stored bookmark or type the URL address directly into your browser. If you provide personal or financial information about yourself over the internet, do so only at secure websites – to determine if a website is secure, look for a URL that begins with “https” instead of “http” or a padlock icon in the bottom of the browser’s status bar.

And when it comes time to upgrade to a new computer, remove all your personal information from the old one before you dispose of it. Using the “delete” function isn’t sufficient to do the job; overwrite the hard drive using a “wipe” utility program (several are available on the market). The minimal cost of investing in this software may save you from being wiped out later by an identity thief. There are also services that will take your old computer and recycle it, giving you a certification that the data is being wiped from the device before redeployment.

Lastly, Be Diligent

As the grizzled old duty sergeant used to say on the television show “Hill Street Blues” – Be careful out there. The identity you save may be your own!

Diversification: I Know I Should, But Why?

Sep 16th, 2015
by jblankenship.
1 comment
diversification of cakes

Photo credit: malomar

Any discussion of the tenets of long-term investing includes the recommendation for diversification. This concept is delivered almost without thought – after all, as children we are taught “Don’t put all your eggs in one basket!”. But have you ever stopped to consider just why we should diversify?

Of course, in the example of the saying about the eggs, it’s simple spreading of risk: if you have all your eggs in one basket and you drop that basket… all your eggs have broken! By spreading your eggs into a second basket, if one basket is dropped, only those eggs in that basket will break, and you’ve still got one basket of good, unbroken eggs.

What if we add a third basket? A fourth? As you might imagine, it soon becomes too clumsy to carry so many baskets (potentially one for each egg). One person couldn’t possibly manage twelve baskets effectively just to harvest a dozen eggs. So, while diversification makes sense to a degree, you always must keep in mind that it can be applied to an extreme and you lose the efficiency of the basket, plus your costs increase.

Enough about eggs for now though. Why do we preach diversification in investing? The root of this concept (at least in the modern age) come from something called “Modern Portfolio Theory”, which was developed by a fellow named Harry Markowitz. The overall theory is pretty weighty so we won’t cover it completely here (although I’d be happy to discuss it with you if you wish). The gist of the benefit of diversification follows.

Decisions about investments are always made in an environment of uncertainty. This is because, even though we have a belief that our investments will hold their value and will increase in value over time, there is no certainty that this will be the case. We can study the past performance, the present activity, and many pieces of information about the particular security – but we have no surety that the increase we hope for will occur.

This uncertainty is due to the continuous up and down volatility in investment prices. As an example, if a stock is worth $20 now and was worth $15 last week, we have no idea if it will be worth $30 tomorrow or possibly even $10. This shouldn’t be a surprise: how many times have you seen something in the news that seems like a good thing for the economy, like an interest rate cut – only to see the market drop like a stone at the release of the news? The opposite happens just as often.

So – what’s a guy to do? Enter diversification.

Diversification – Your Key to Reduce Volatility

It’s not hard to understand that every dollar you save in taxes and overall costs of investments equates to an increase in your bottom line total return. What may be difficult to follow though, is that diversification of risk can reduce volatility, and therefore reduce loss. An example may be the best way to get this point across.

Let’s say you have $1,000 in your overall portfolio, and through the year you have achieved a 20% gain. Shortly thereafter, your investment experiences a correction, amounting to a 20% loss. Most folks would think that you’ve just held ground and broke even in your account – but most folks would be wrong to think so. What happened is that your account gained 20% to a value of $1,200, and then the account lost 20% or $240 (.20 times $1,200), so in the end you have actually lost a net amount of $40. Just for grins, the result is the same if you work things in the reverse as well: a 20% loss gives you a balance of $800, and then a 20% gain ($160) gives you a final balance of $960, for a loss of the same $40.

For purposes of comparison, let’s look at another situation: a 10% gain followed by a 10% loss. From our previous example, we know that this isn’t just “holding ground” – we have lost a total of $10 in the process. We started with $1,000 and gained 10% to a value of $1,100, and then experienced a 10% loss ($110), for a final balance of $990.

What’s truly important to note about these two examples is the relationship of the volatility (the percentage size of the gains and losses) to the actual dollar loss realized. In the first case, the volatility was double that of the second (20% versus 10%), but the resulting loss was quadrupled!

If we took the first example and changed the volatility to a 40% swing in either direction, the resulting loss is even greater – a gain of 40% gives us $1,400, and the following loss of 40% ($560) brings us to a final balance of $840, for a loss of $160, which is sixteen times the loss we suffered in the 10% example. If you’re a mathematician, you’ll notice the relationship here: the level of volatility that we experience results in an exponential loss in the account. If we had a 50% gain followed by a 50% loss, our overall loss would be twenty-five times the loss in the 10% example, and so on.

It doesn’t take long to understand why it is important to keep volatility in your portfolio low: the smaller the “swings” of volatility, the lower your potential loss. When you increase the “swings” of volatility by a factor of one, your potential losses increase exponentially.

So – if I’ve done my job and explained this properly, the question on your mind at this point should be: “How do I get myself some of this low volatility?” And if you’ve been reading carefully up to this point, the answer should be obvious: diversify.

And how do we do that? Much the same as the eggsample from earlier, you want to find a place (or group of places) to invest your money that will result in less volatility. All investments are affected by various things around them – oil and gas companies are impacted by the cost of crude oil, banks are impacted by interest rates and the credit crunch, department stores are impacted by inflation, employment, and the seasons. What we look for are investment vehicles that are diverse enough to not all be impacted by the same kinds of things in the same magnitude at the same time. Therefore we diversify into different capitalization-weightings, different countries, and different sectors, all in an effort to reduce the overall risk of loss (volatility) in our portfolio.

For example – by investing in the S&P 500 index, we are diversifying across many different companies, sectors, and industries in the US marketplace. In addition to this investment, we might add a holding in the EAFE index (Europe, AustralAsia and Far East), further diversifying across different countries, companies, sectors and industries. By doing so, if something happens that makes United States Steel’s stock to lose 20% in value, the impact on our portfolio is minimized, since US Steel is only a very small portion of our portfolio. By the same token, if an event should occur that caused the stock market in Singapore to suddenly crash, and this event was limited in its exposure to just Singapore, then as before, since we’re diversified among many countries, our exposure to volatility is minimized.

I hope this explanation helps you to understand one of the very basic pillars of investing discipline. I would be remiss, though, if I didn’t point out that diversification can also have a negative impact on your gains. When you reduce the volatility in your investments, you’re not only reducing the downside swing, but the upside swing as well. What we give up is the “once in a lifetime” homerun-type of investments.

For example, if you happened to put all of your money in Google at it’s initial offering in August of 2004, by the end of that year you could have doubled your money. In the diversification example using the S&P 500, you would have had a small percentage of your portfolio in Google, and your overall return from August to December in 2004 would have been 10.8%. For an example on the other side of the coin, if you had placed your nest egg in Enron stock in late 2000, by mid 2001, you could have virtually nothing left, while the S&P 500 had fallen by a mere 17% during the same period. Reducing volatility, while it causes you to give up the spectacular gains, will also save you from the spectacular crashes. And we all know which one happens more often.

Do You Have The Will?

Sep 14th, 2015
by jblankenship.
No comments yet
the will

Photo credit: malomar

Statistics show us that approximately 70% of all Americans don’t have a valid will. Are you one of them? With that statistic, chances are that you don’t. This means that in a circle of four people, three probably don’t have a will.

This situation begs an obvious question: Do I need a will? One simple way to determine if you need a will is if you can’t truthfully answer “No” to both of the following questions:

Do you care who gets your money and property when you die?
Do you care who is appointed guardian of your minor children if you die?

If you answered “Yes” to either or both of those questions, you need a will! Otherwise, state laws will determine the outcome of those situations – and it’s not likely that you would have made the same decisions that the state would.

Why should you have a will?

A will is appropriate for anyone, not just the rich, no matter how much money or property you have. A will is your instructions for how you’d like your belongings and assets distributed at your passing. Without a will, the courts will decide to whom your property will go – without regard to your wishes. The courts, according to state law, have a specific succession path that they will follow in distributing your assets. They won’t account for the fact that you loaned some money to your first child when they purchased their home, and as such you had intended to “equal things out” with the other two kids at your passing, for example.

In addition, anyone with minor children should definitely have a will. Only you (and presumably your spouse) should be making the decisions about who will care for the children as their guardian in the event of your untimely death. No one wants to think about death as a near-term event – but it happens every day. If it should happen to you and you don’t have a will in effect, your family and loved ones will be thrown into a confusing world of decisions that they aren’t prepared to make, on top of the very difficult situation that they already have in dealing with your death.

A third reason to have a will is for tax benefits. By utilizing your will to pass along your assets that have grown in value through the years (as opposed to making gifts during your lifetime), your heirs will receive the property at a “stepped up” value as of the date of your death (in most cases). For example, let’s say you own a piece of farmland that you purchased for $100,000 many years ago. Today, the land is actually worth something like $1,500,000 due to appreciation in land values. If you were to give this land to your son as a gift during your lifetime, and the son sold the land, he would owe capital gains tax on $1,400,000 (the growth of the value of the land), which would amount to something like $210,000 at a 15% rate. On the other hand, if you bequeathed the property to your son via your will (assuming that your overall estate was worth something south of $5.45 million), then there would be no tax owed, either on the transfer of the property or when your son sells it, if he sells immediately. This is because the act of inheriting property causes a “step up” in the value of the property, and so the tax basis of the property is $1,500,000, leaving no capital gain to tax (assuming again that the son sells the property for $1,500,000).

So – how do you get started? As mentioned above, there are a few things you need to consider when setting up a will. Some of the most difficult decisions generally surround the idea of guardianship for the children. Think through this decision carefully, along with your spouse (if you have one), and then talk to the person or persons you’ve chosen to be guardians. I generally recommend that you choose a guardian for the children and a trustee to manage funds that have been set aside for the children’s care (two different people). This way you have a separation of powers, and two heads working together for the benefit of the kids. In addition, many times if there is only a guardian who has the additional duty of administering funds, the guardian may tend to over- or under-utilize the funds on the children’s behalf. Having a separate trustee to help with this process can make sure that the funds are used as you intended.

The second person that you need to name in your will is an executor. This individual will be responsible for administering your will and your estate when you pass. Depending upon the circumstances, this person may need to be very skilled in working with others (your beneficiaries) to ensure that your instructions are properly enacted.

The specific instructions that you wish to have carried out completes the picture. In some cases, especially those including children, you’ll want the will to establish one or more trusts, requiring the naming of a trustee or trustees. This will help to ensure that your funds are used as you intended. You’ll also need to think about how the rest of your assets, money, and property might be distributed.

Start by gathering the names, addressses and dates of birth for you, your spouse, your children, other beneficiaries, your proposed guardian(s), and your proposed executor(s). I used plurals for guardian(s) and executor(s) because it can be very helpful to have “backup” people named for the event your original choice predeceases you.

Next, gather together your debt information – mortgages, car loans, credit cards, student loans, and any other loans you might have. Then list your assets – property, stocks, bonds, accounts, homes, personal property, etc.. Take pains to specifically identify each item of debt and assets, so that it is very clear which item you are referring to.

Lastly, gather copies of other existing legal documents, including divorce decrees, prior wills, trusts, prenuptual agreements, and any other document that might affect the legal distribution of your assets.

When you talk to your attorney, he or she will likely have other items that you need to gather, but this should head you in the right direction. And I do advocate using a lawyer – this is much too important for a “do-it-yourself” job. When you think about the consequences of doing it incorrectly, the cost for the attorney is a pretty small sum by comparison.

So – if you happen to be “one of the other three” in the circle of four, don’t delay. There’s no sense in putting your family and beneficiaries through the hassle of probate if you can help it – and you can. If you have the will.

Exception to the Divorced Spouse Remarriage Rule

Sep 9th, 2015
by jblankenship.
6 comments

remarriedGenerally speaking, when a divorcee is receiving a Social Security spousal benefit based on an ex-spouse’s record, the recipient must remain unmarried in order to continue receiving the ex-spouse benefit. (For more details on this, see Coordinating Social Security Benefits in Matters of Divorce and Remarriage.) In many cases,when a divorcee remarries, the spousal benefit based on his or her ex-spouse’s record will end.

However, there is an exception to this rule that I recently became aware of. It’s in part because the circumstances surrounding this exception have recently become more common – so let’s get to the exception.

The Exception

If the person who is receiving a spousal benefit based on an ex-spouse’s record marries someone who is currently receiving widow(er)’s, mother’s, father’s, divorced spouse’s, or parents’ benefits, the spousal benefit will continue. That’s a mouthful! Let’s play out an example:

Jane is divorced from Gerald. Jane has been receiving spousal benefits based on Gerald’s record for the past couple of years. Jane is engaged to marry Sheryl.  Sheryl’s husband Ed died several years ago, and she has been collecting a widow’s benefit (survivor benefit) based on Ed’s record for a couple of years now.

Since Sheryl is receiving the survivor benefit based on Ed’s record, the exception applies for Jane’s ex-spouse benefit, and Jane will be eligible to continue receiving this benefit after the marriage. If Sheryl was not currently collecting the survivor’s benefit (or one of the other excepted benefits), Jane’s ex-spouse benefit would end upon their marriage.

One important factor here is that Jane and Sheryl are both currently receiving the benefits (in Social Security parlance, they are entitled to the benefits). If Jane is not currently receiving the ex-spouse benefit when she and Sheryl get married, she would not be allowed to begin receiving the ex-spouse benefit based on Gerald’s record while she and Sheryl are married.

Likewise, if Sheryl was not receiving the survivor benefit or one of the other excepted benefits on the date of the marriage, Jane’s ex-spouse benefit would end upon their marriage.

Timing of Delay Credits

Sep 2nd, 2015
by jblankenship.
12 comments

credit for delayingWhen you delay filing for your Social Security benefits past Full Retirement Age (FRA – age 66 if you were born between 1943 and 1954) you earn Delay Credits for each month that you delay. The credit amount is 2/3% per month, or a total of 8% for every 12 months of delay.

When you file for benefits after delaying, these credits are applied to your PIA. The timing of the application of your credits is not immediate, though. Delay credits are added to your benefit only at the beginning of a new year, so this can cause a bit of confusion as you begin receiving benefits.

Example

For example, Janice was born on October 14, 1949, so she will turn age 66 on October 14, 2015. Janice’s PIA is $1,000. If you’ll remember from this post (When is Your Social Security Birthday), Social Security considers Janice to have reached FRA on October 1, 2015. Janice intends to delay filing for her Social Security benefits until her 68th birthday in order to accrue 16% increase to her benefits.

So upon reaching her 68th birthday, Janice contacts SSA and files for her benefit to begin in October, 2017. Beginning in October, Janice will receive a benefit that is equal to her PIA plus 10%, a total of $1,100 per month. She will receive this benefit for October, November, and December of that year.

Then beginning in January, Janice will receive an increase up to the full amount of delay credits, 16%, for a total benefit of $1,160 per month. Janice will continue to receive this benefit for the remainder of her life, unless at some point in the future she becomes eligible for a Spousal or Survivor Benefit that is greater than her own benefit.

Exceptions

There are two exceptions to the way that delay credits are applied: upon reaching age 70 or at your death. If you start your benefits at age 70, no matter what month of the year it is your full delay credits are applied to your benefit on the first month. Likewise, upon your death all delay credits are applied to your survivor’s available benefit no matter what month the survivor begins to receive the benefit.

Vacation Home Rentals and Your Income Taxes

Aug 31st, 2015
by jblankenship.
1 comment

vacation homeYou may have a vacation home that you only spend a small amount of time at each year, and the rest of the time you rent the home out to other folks who wish to vacation in your little slice of heaven. The rents that you receive is considered taxable income, to the extent that it exceeds the applicable expenses. Plus, if the vacation home is partly used for your own purposes, the expenses (allocated to the time the property is rented) cannot exceed the amount of rent income from the property (you can’t claim a loss). here are some tips on collecting rent on time.

Recently the IRS issued their Summertime Tax Tip 2015-03 which details some tips you should know about Vacation Home Rentals for your tax reporting purposes.

IRS Tips about Vacation Home Rentals

If you rent a home to others, you usually must report the rental income on your tax return. However, you may not have to report the rent you get if the rental period is short and you also use the property as your home. In most cases, you can deduct your rental expenses. When you also use the rental as your home, your deduction may be limited. Here are some basic tax tips that you should know if you rent out a vacation home:

  • Vacation Home.  A vacation home can be a house, apartment, condominium, mobile home, boat or similar property.
  • Schedule E.  You usually report rental income and rental expenses on Schedule E, Supplemental Income and Loss. Your rental income may also be subject to Net Investment Income Tax.
  • Used as a Home.  If the property is “used as a home,” your rental expense deduction is limited. This means your deduction for rental expenses can’t be more than the rent you received. For more about these rules, see Publication 527, Residential Rental Property (Including Rental of Vacation Homes).
  • Divide Expenses.  If you personally use your property and also rent it to others, special rules apply. You must divide your expenses between the rental use and the personal use. To figure how to divide your costs, you must compare the number of days for each type of use with the total days of use.
  • Personal Use.  Personal use may include use by your family. It may also include use by any other property owners or their family. Use by anyone who pays less than a fair rental price is also personal use.
  • Schedule A.  Report deductible expenses for personal use on Schedule A, Itemized Deductions. These may include costs such as mortgage interest, property taxes and casualty losses.
  • Rented Less than 15 Days.  If the property is “used as a home” and you rent it out fewer than 15 days per year, you do not have to report the rental income. In this case you deduct your qualified expenses on schedule A.
  • Use IRS Free File.  If you still need to file your 2014 tax return, you can use IRS Free File to make filing easier. Free File is available untilOct. 15. If you make $60,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. Free File is available only through the IRS.gov website.

You can get forms and publications on IRS.gov/forms at any time.

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Traveling for Charitable Purposes

Aug 26th, 2015
by jblankenship.
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a horse named charitySometimes charitable work involves travel – such as for the Red Cross, for example. Did you know that your travel expenses for charitable work can be a tax deduction? Recently the IRS sent out a Summertime Tax Tip (2015-12) that outlines some valuable information about this deduction.

Tips on Travel While Giving Your Services to Charity

Do you plan to donate your services to charity this summer? Will you travel as part of the service? If so, some travel expenses may help lower your taxes when you file your tax return next year. Here are several tax tips that you should know if you travel while giving your services to charity:

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

For more on these rules, see Publication 526, Charitable Contributions. You can get it on IRS.gov/forms at any time.

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Personality Influences Financial Decisions

Aug 24th, 2015
by jblankenship.
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decisions

Photo credit: jb

The recent volatility in the stock market has everyone a bit uneasy – even folks who have worked with a trusted financial adviser for years. But if you’ve never worked with an adviser before, you may be surprised to find that one of the first things he or she will do is ask you to fill out a risk analysis questionnaire. This questionnaire is designed to help you understand your financial decisions and the process of making decisions. It’s all tied to your personality, your own unique world-view.

Why is risk analysis important before you make decisions with your money? Risk tolerance is an important part of investing – that should be understood at the outset. But the real value of answering a lot of questions about your risk tolerance is to tell you what you don’t know – how the sources of your money, the way you made it, how outside forces have shaped your view of it and how you’re handling it now will help shape every decision you make about money now and in the future.

The most important thing a risk analysis questionnaire can tell is what’s important about money to you. Trained financial advisers can determine your money personality through a process of questioning discovery. Planners can then guide investors within their money personality. Do you want certainty? Are you willing to take a little risk or let it roll because long-term results are more important than short-term volatility? Or will you take more risks with your money because you can always make more of it?

A financial planner tries to see through the static to find out what you really need to create a solid financial life. But it might make sense to ask yourself a few questions before you and your planner sit down:

  1. What’s important about money to me?
  2. What do I do with my money? What do I plan to do with my savings?
  3. If money was absolutely not an issue, what would I do with my life?
  4. Has the way I’ve made my money – through work, marriage, windfall – affected the way I think about money in a particular way?
  5. How much debt do I have, what kinds of debt, and how do I feel about it?
  6. Am I more concerned about maintaining the value of my initial investment or making a profit from it?
  7. Am I willing to give up that stability for the chance at long-term growth?
  8. What am I most likely to enjoy spending money on?
  9. How would I feel if the value of my investment dropped minimally for several months? How about significantly over several months? What is a significant drop in value to me?
  10. How would I feel if the value of my investment dropped minimally or stayed constant (no growth) for several years?
  11. If I had to list three things I really wanted to do with my money, what would they be?
  12. What does retirement mean to me? Does it mean quitting work entirely and doing whatever I want to do or working in a new career full- or part-time? Or would I take on volunteer work in retirement?
  13. Do I want kids? Do I understand the financial commitment?
  14. If I have kids, do I expect them to pay their own way through college or will I pay all or part of it? What kind of shape am I in to help with paying for their college education?
  15. How’s my health and my health insurance coverage?
  16. What kind of physical and financial shape are my parents in? Are they enjoying retirement, and what does retirement look like for them?

One of the toughest aspects of getting a financial plan going is recognizing how your personal style, mindset, and life situation affect your investment decisions. A financial professional will understand this challenge and can help you think through your choices. Your resulting plan – from investments to insurance, savings to estate plans – should feel like a perfect fit for you.

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