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

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Tagged: financial planning

When it Makes Sense to Take Social Security Early

May 1st, 2019

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In this blog many times we’ve covered how beneficial it can be to delay receiving Social Security benefits as long as you can. An example of this discussion is in the article Ah, Sweet Procrastination – it makes good financial sense to delay receiving your benefit to age 70 in many cases, but of course not all.

The reason delayed filing can be such a great benefit is that this government-backed income stream is pretty much as good as you can get, in terms of longevity insurance. When you start receiving the benefit, you’ll continue to receive it through your entire life. When you start receiving your benefit impacts the amount that you will receive for your life. Plus, depending upon the amount of your spouse’s benefit, it will impact the amount that your spouse would receive as a Survivor’s Benefit as well.

But there are times when it may make more sense to begin receiving your benefit earlier…

Starting Early

Circumstances require it. If you’re in ill health, have a shortened life expectancy, or have very limited other resources, it may be necessary to start taking your Social Security benefit early. The financial calculations that we do that explain how delaying receipt of benefits is the better choice, always assume that the recipient will live to at least age 80 or beyond and can get along using other resources until filing at age 70. If one or the other (or both) of these circumstances is not the case for you, it likely makes more sense to begin taking your benefit earlier.

Spouse with a relatively small benefit. If the spouse with the lower wage base has earned a relatively small benefit and intends to switch over to a Spousal Benefit as soon as it makes financial sense, it might make more sense to start taking the smaller benefit early, even though it is reduced. In this case the financial impact of starting to take the benefit early doesn’t amount to a significant reduction in real dollars, so taking the benefit for several years is just extra “gravy on your french fries”, in a manner of speaking.

Social Security doesn’t matter to you. If you have more funds than you really need and the Social Security benefit is of very little real benefit to you – or if you consider the Social Security system a “safety net” for needy folks, you might want to start early. Or you may choose to not take the benefit at all.

Psychological impact. If you simply cannot stand the thought of leaving your Social Security benefit in the government’s hands any longer than necessary and you feel it’s to your best interest to start early (even in the face of facts to the contrary), then by all means start taking benefits early. If that’s what it takes to ease your mind, you should do it. Life’s too short to be wrought up over such matters.

Closing Thoughts

As stated before, in many cases it makes the most financial sense for the spouse with the higher earned benefit to delay benefits to age 70, but not in all cases. In order to really get a good handle on how these calculations would work for you, it may help to hire a professional advisor to run through the numbers with you.

Posted on May 1st, 2019

by author: jblankenship.

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

Medicaid and Retirement Accounts

Apr 29th, 2019

8 comments

Statistics tell us that approximately 25% of us will need some sort of extended long-term nursing care during our lives – and as our life spans increase with improvements in medical care, this number is likely to increase.

Most of us have experienced family or friends needing this type of long-term nursing care. Since Medicare doesn’t provide much in the way of long-term care benefits, the individual is left with three possible sources to pay for long-term care:

private payments from your savings and other sources
long-term care insurance coverage (LTCI)
Medicaid

Photo credit: diedoe

Given the tremendous costs for long-term care, many individuals are faced with the distinct possibility that any savings that they have amassed over their lifetimes (and that they hoped to pass along to their heirs) could be quickly wiped out or drastically reduced with a stint in a skilled-care facility. Then who will take care of the wall?

Medicaid

Briefly, Medicaid was originally introduced in 1965 (alongside Medicare) as a “safety net” for healthcare, primarily to help the poverty-stricken. Along in the late ’80’s, it became clear that this safety net could be beneficial to people of modest means as well. So the laws were adjusted to allow for additional beneficiaries of the program through some simple planning. Later during the early ’90’s, the eligibility requirements were tightened up a bit, but with planning, certain beneficiaries can still receive Medicaid benefits.

Eligibility for Medicaid is based upon the assets available to the individual – only about $2,000 is allowed to remain in savings vehicles. Community (joint, owned by both members of a married couple) accounts are subject to special rules, and depending upon how your state chooses to administer the program, half of these jointly-held accounts could be considered eligible assets. Other assets, including primary residences, annuities, and life estates, receive special treatment under Medicaid eligibility rules as well.

Retirement Accounts and Medicaid Eligibility

How are your IRA, 401(k), and other accounts viewed with regard to Medicaid eligibility? As a general rule, retirement accounts are included as available assets. Even if the individual is under age 59½ and otherwise ineligible for distributions without penalty. The retirement accounts must be liquidated before the individual can be eligible for Medicaid coverage.

One way to protect assets from liquidation is if the account is in periodic payment status. This might mean the account is subject to Required Minimum Distribution (RMD) either due to age 70½ requirement or if the IRA is inherited and subject to inherited RMD. In some states, an account in periodic payment status is considered an income source rather than an asset. The circumstances might help to protect the account’s assets from being included in total for Medicaid eligibility.

For example, if an individual was in RMD status due to being over age 70½, his account would be considered in payment status. If the account was worth $200,000, this amount would not be counted against him for Medicaid eligility, but the periodic income stream would be. If he is age 72, his annual required payment from the account would be roughly $7,812, which would be considered for his income budget, approximately $651 per month. If this was his only income, that amount would be paid to the nursing home – with the balance of the cost of the nursing care paid by Medicaid.

If the individual is married and the other spouse is not applying for Medicaid, there are allowances made for monthly minimum maintenance (of the non-Medicaid spouse) as well. In 2019, the maximum monthly maintenance needs allowance is $3,160.50. This is the most in monthly income that a community spouse is allowed to have if her own income is not enough to live on and she must take some or all of the institutionalized spouse’s income. The minimum monthly maintenance needs allowance for the lower 48 states remains $2,057.50 ($2,572.50 for Alaska and $2,366.25 for Hawaii) until July 1, 2019.

Not all states utilize a minimum and maximum income allowance. Some states use just one figure that falls somewhere between the federally set minimum and maximum figures. For example, as of 2019, New York, Texas, and California all use a standard monthly figure of $3,160.50 (the maximum), and Illinois uses a standard monthly figure of $2,739.

What About a Roth IRA?

So, if you’re thinking ahead you’re wondering how this impacts a Roth IRA… since a Roth IRA is not subject to minimum distribution rules. Rightly so – the Roth IRA is never in a payment status as long as the original owner is living. As such, your own Roth IRA assets are counted toward Medicaid eligibility status. These assets would have to be spent down before the individual could become eligible for Medicaid.

Bottom line…

So the bottom line is that you need to consider lots of things as you think about Medicaid eligibility. If you have significant assets available, you could be better off to consider a Long-Term Care Insurance (LTCI) strategy, as otherwise your assets might have to be spent down and quite possibly depleted. Unfortunately there isn’t a “rule of thumb” to use in determining whether LTCI makes sense. Each individual’s situation will be a little different, taking into account medical history, family medical history, asset base, age, etc.. This is the sort of analysis that you need to do as you near retirement age in order to consider whether or not LTCI or Medicaid could be a part of your future healthcare plans.

Posted on Apr 29th, 2019

by author: jblankenship.

8 comments already - add to the conversation!

Posted in: financial planning, health insurance, IRA, Medicaid, Social Security.
Tagged: financial planning · IRA · Social Security

To Gift or Inherit? Deciding When to Bequeath Assets

Apr 26th, 2019

by sraskie.

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After beneficiaries are named and you understand how assets are distributed at death, we need to discuss the tax implications of gifted and inherited assets. The following is a description of the tax implications of non-qualified assets (those not in 401(k)s or IRAs) received by beneficiaries if gifted during lifetime or inherited after death.

Our example will use stocks in a brokerage account as the assets demonstrating the tax implications of assets gifted during lifetime or inherited at death.

Let’s assume that an individual has a brokerage account and they initially purchased $250,000 worth of stock in the account. Several years have gone by and the account as grown to $500,000. For tax purposes the basis in the account is $250,000. The individual is contemplating gifting the account to their beneficiary.

If the individual decides to gift the account during their lifetime to their beneficiary, the beneficiary receives the assets and acquires the same tax basis as the original account owner. This transfer of basis, called carryover basis, means that if the beneficiary then sells any or all the stocks in the account, the beneficiary’s tax basis is $250,000. So, if the beneficiary sold the entire account for its current value of $500,000, the taxable gain would be $250,000 – the difference between the carryover basis of $250,000 and the sales price of $500,000.

On the other hand, if the original account owner decides not to gift the account during their lifetime and instead waits until dying for the beneficiary to inherit the account, the beneficiary receives the assets and a new basis is established. This new basis, called a step-up (or step-to) in basis, means that the beneficiary’s tax basis is the fair market value of the account assets on the account owner’s date of death.

In this example, if the fair market value of the stocks is $500,000 when the account owner dies, the beneficiary’s new tax basis is $500,000. Thus, if the beneficiary sold the account for $500,000, the tax liability to the beneficiary would be zero. Any gains or losses on the inherited $500,000 would be subject to short- or long-term gains and losses, depending on the beneficiary’s holding period after inheriting the assets.

This same tax basis situation would apply to mutual funds, ETFs, real estate, and other non-qualified assets. Of course, the intentions of the individual gifting or leaving the assets after their death is entirely their prerogative – which may supersede regardless of the tax implications to the beneficiary.

Posted on Apr 26th, 2019

by author: sraskie.

Posted in: tax, tax basis.
Tagged: gifting · tax basis

How Property Transfers At Death

Apr 24th, 2019

by sraskie.

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divorce throws a curve — Photo courtesy of Bec Brown via Unsplash.com.

When you die, the way in which your property is handled will depend on the type of documents (or lack thereof) you’ve set up before your death. The following is a summary of the ways your property transfers to heirs when you pass away.

Life Insurance. At death, life insurance proceeds are passed to your beneficiaries (and in most cases, tax free). For example, if you have a life insurance policy with a face amount of $500,000, when you die, your beneficiaries receive the $500,000 face amount tax free.

When you purchase life insurance, you name your beneficiary or beneficiaries – those who receive the death benefit when you die. Most married couples will name each other as beneficiaries on their respective polices, some will name charities, and other will name other relatives, individuals, or trusts. Life insurance contracts generally avoid probate (the legal process of validating a will and division of property), unless you name your estate beneficiary (a bad idea) or fail to name a beneficiary (also a bad idea).

Annuities. At death annuities operate the same way as life insurance regarding beneficiaries. A big difference however, is the tax treatment. Even though an annuity may pay a death benefit, in most cases it is taxable to the beneficiary. This is different from life insurance death benefits that are received tax free. Any taxable annuity death benefits are taxed as ordinary income.

Trusts. Trusts can be established either during your lifetime or at your death. They may also be revocable (changeable) or irrevocable (not changeable). Trusts are set up by a grantor (the person wanting the trust) and assets are placed in the trust, managed by a trustee, for the benefit of the trust beneficiary. When you die, the assets in the trust are still managed by the trustee for the benefit of the beneficiary. Like annuities and life insurance, trusts avoid probate.

Brokerage Accounts. When you have a brokerage account where you hold stocks, bonds, mutual funds, or ETFs it’s called a non-qualified brokerage account. The non-qualified means that it’s not a 401(k) or IRA. When you open this type of account, you are given the option to name a beneficiary on the account should you die. At death, the property passes to the beneficiary. The beneficiary also receives special tax treatment on the account. Brokerage accounts also avoid probate.

Retirement plans. When you have retirement plans such as 401(k)s and IRAs you also name beneficiaries who get the account assets when you die. The tax treatment of the assets will depend on the account (Roth or not), and what the beneficiary chooses to do with the assets (sell them all or take minimum distributions). Brokerage accounts avoid probate.

Wills. A will is a written legal document that directs how and to whom your assets are dispersed after your death. Wills also name a guardian(s) for minor children should both parents die. Wills also name an executor for your estate that helps direct where assets go, what assets to sell, and filing the final tax return for the deceased and or the estate.

As mentioned before, probate is the process of validating a will. Thus, it’s a public process, and often long and expensive. Additionally, the documents mentioned above supersede the language in a will. In other words, if your will states that your kids get your IRA assets at your death, but your IRA beneficiary is another person or entity, the IRA overrides the language in the will.

Dying without a will means dying intestate. Dying intestate means that the state determines how your assets are divided, who gets them, and if you have minor children, who becomes their guardian. Different states have different laws, but be assured, the laws may differ from what your intentions are or who you think should get your assets or be guardians. Don’t risk it. If you don’t have a will, or your beneficiaries named, consider taking care of this today.

An extremely important point not to be overlooked is the need to update your beneficiaries or documents whenever you have a life changing event. Life changes mean births, deaths, divorces, job changes, etc. For example, if you get divorced and remarry, and forget to change your beneficiary from your ex-spouse to your new spouse – and you die – your ex-spouse is still the beneficiary and gets the property. It is paramount to update your accounts, estate documents, insurance policies, and retirement plans to reflect any life changes.

Posted on Apr 24th, 2019

by author: sraskie.

Posted in: estate planning.

Celebrating 15 years: Financial Planning 101

Apr 19th, 2019

2 comments

*Original layout of Financial Ducks In a Row*

On this date fifteen years ago, April 19, 2004, this blog was officially launched. The article below was the first post ever, and I’ve reposted it here in celebration of the 15 year anniversary of Financial Ducks In A Row.

I have not edited the content below, it’s exactly the same as it was originally posted back in 2004.

A lot has changed over the years, and I continue to enjoy sharing sound financial principles, information and advice through this medium, and I hope to keep it up for a long time into the future.

Nine Essential Tips for a Bright Financial Future

1. See a lawyer and make a Will. If you have a Will make sure it is current and valid in your home state. Make sure that you and your spouse have reviewed each other’s Will – ensuring that both of your wishes will be carried out. Provide for guardianship of minor children, and education and maintenance trusts.
2. Pay off your credit cards. Forty percent of Americans carry an account balance – not good. Create a systematic plan to pay down balances. Don’t fall into the “0% balance transfer game” as it will hurt your FICO score. Credit scores matter not only to credit card companies but to insurance companies as well; you can avoid an unpleasant increase in your insurance rates by managing your credit wisely.
3. Buy term life insurance equal to 6-8 times your annual income. Most consumers don’t need a permanent policy (such as whole life or universal life). Also consider purchasing disability insurance; think of it as “paycheck insurance.” Stay-at-home spouses need life insurance, too! Note: Each family’s needs are different. Some families have a need for other kinds of life insurance, so you should review your situation carefully with an insurance professional or two before making decisions in this area.
4. Build a 3 to 6 month emergency fund. Establish a home equity line of credit before you need it – this can take the place of part of your emergency fund.
5. Don’t count on social security! Fund your IRA each and every year. If you don’t fund it annually, you lose the opportunity. Fund a Roth IRA over a traditional IRA if you qualify.
6. If offered, contribute to your 401(k), 403(b) or other employer-sponsored saving plan. Use your company’s flex spending plan to leverage tax advantages. If you don’t use your flex plan or fund your retirement plan annually, you lose the opportunity – and the tax advantages – for that year.
7. Buy a home if you can afford it. Maintain it properly. Build equity in your property. You’ll have much more to show for your money spent than a box full of rental receipts!
8. Use broad market stock index funds and direct purchase government bonds to reduce risk, minimize costs and diversify your portfolio. If you have limited options, for example in your 401(k) plan, make sure that you diversify across a broad spectrum of options. Don’t over-weight in any one security, especially your employer’s stock – remember ENRON?

If you are unsure about your financial affairs or you have financial goals such as retirement planning, college funding, business succession or estate planning that you’d like help achieving, call Blankenship Financial Planning at 217/488-6473 to schedule a no-cost, no-obligation “Get Acquainted” meeting to discuss your situation.

Posted on Apr 19th, 2019

by author: jblankenship.

Posted in: #noTOP, financial planning, personal finance.

Roth IRA Eligibility

Apr 15th, 2019

5 comments

Photo credit: diedoe

The Roth IRA is a very valuable retirement savings vehicle. There are several reasons that the Roth IRA is so valuable, including:

qualified withdrawals are tax free
withdrawal of regular contributions is available at any time for any reason
there is never a Required Minimum Distribution for the original account owner
beneficiaries can receive distributions from the account tax-free

With all of these benefits, you can see why the Roth IRA has become a very popular option for retirement savings, as well as for estate planning. So the question now becomes: Am I eligible to contribute to a Roth IRA?

Roth IRA Eligibility

The eligibility requirements for a Roth IRA are as follows:

You must have earned income. This means you receive compensation in the form of wages, salaries, tips, professional fees, bonuses, commissions, self-employment income, nontaxable combat pay, and taxable alimony or maintenance. If you are married and you had no earned income (or your earned income is less than the maximum Roth IRA contribution amount), your Roth IRA contribution may be based on your spouse’s earned income.
Your Modified Adjusted Gross Income (MAGI) must be less than:
1. $193,000 (for 2019) if your filing status is Married Filing Jointly or Qualifying Widow(er); or
2. 122,000 (for 2019) if your filing status is Single, Head of Household, or Married Filing Separately (and you did not live with your spouse at any time during the year); or
3. $10,000 if your filing status is Married Filing Separately and you lived with your spouse at any time during the year.

And that’s it. You are not limited by participation in an employer-sponsored plan as you are with deductibility of a traditional IRA. There are a few limiting factors, though:

You cannot contribute more than your earned income.
A spousal contribution is allowed, as long as the total of contributions to personal and spousal IRAs doesn’t exceed the total of your own and your spouse’s earned income.
You are limited by an annual amount (for 2019 it’s $6,000 plus an over age 50 “catch up” of $1,000). Your total IRA contributions (traditional and Roth added together) cannot exceed that annual limit.
When your MAGI reaches a certain amount, your contribution amount will begin to be limited. You can visit this page for more details on the MAGI limits and how they are applied.

Posted on Apr 15th, 2019

by author: jblankenship.

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Posted in: IRA, retirement plan, Roth IRA.
Tagged: IRA · retirement plan · roth ira

Calculating the Spousal Benefit

Apr 10th, 2019

4 comments

The Spousal Benefit is one of the most confusing aspects of the Social Security retirement benefit system. It may be vaguely familiar that the spouse with the lower wage base is eligible for 50% of the higher wage base spouse’s benefit, or something like that…

How is the Spousal Benefit actually calculated?

Calculating the Spousal Benefit

Here’s how the Spousal Benefit is calculated:

First of all, the Spousal Benefit is based upon a differential – between 50% of the other spouse’s Primary Insurance Amount (PIA) and his or her own PIA.

So what’s the calculation? Let’s look at an example:

Let’s say there’s a couple, both the same age with a Full Retirement Age (FRA) of 66, and the wife has a substantially lower wage base (and therefore a lower benefit) than the husband. At age 62, she files for the her own reduced benefit based on her own record, from a PIA of $800. Her benefit is reduced to $600 due to filing early.

The husband’s PIA is $2,000 per month.

Later on, when they reach age 66, the husband files for his Social Security benefits. The wife is now eligible for a Spousal Benefit, because one of the enabling factors for a Spousal Benefit is that the other spouse has filed for his or her own Social Security benefit. The Spousal Benefit is based on the differential between 50% of the husband’s PIA ($2,000 X 50% = $1,000) and her PIA ($800). The PIA is used to calculate this differential, not her benefit, even though her benefit is reduced since she filed early. The differential between those two factors is $200 ($1,000 minus $800). The differential is then added to her reduced benefit for a total benefit of $800 (reduced benefit of $600 plus the differential of $200). For simplicity, COLAs have not been included in this example.

Let’s adjust the example: Same couple, only now the wife waits until her FRA to begin drawing her own benefit, which is the same time as the husband. Now her Spousal Benefit differential will still be $200 (the differential between 50% of his PIA and her PIA), so her total benefit will now be $1,000 (her unreduced PIA of $800 plus $200 differential).

Now, what if the wife is younger? As long as she’s at least age 62, she can begin receiving the Spousal Benefit once her husband applies for benefits. It’s important to know though, that if she decides to file for the Spousal Benefit prior to her FRA, the Spousal Benefit factor is correspondingly reduced (as would be her own benefit if she filed early).

Instead of 50% of her husband’s PIA, at her age 62 the Spousal Benefit factor would be reduced to 35% of her husband’s PIA, and then the differential calculated as explained before. At age 63 the Spousal Benefit factor would be 37.5%; at age 64, 41.7%; and at age 65 it would be 45.8%. This reduction is calculated as 25/36ths of one percent for each month before her FRA up to 36 months, plus 5/12ths of one percent for each month more than 36 before FRA. The reduction factor is then taken against the original 50% factor to determine the actual percentage of the husband’s PIA to be used in calculating the Spousal Benefit differential.

In this manner, the reduction is 25% for the closest 36 months to FRA, and then an additional 5% for each year more than 3 before FRA that the filing for Spousal Benefits is completed. If you file for Spousal Benefits exactly 4 years before your FRA, the Spousal Benefit factor is reduced by 30%, as an example. So instead of 50%, the most your Spousal benefit could be is 35% (which is a reduction of 30% applied to the original 50%).

In all cases except for someone born before 1954*, filing for a Spousal Benefit deems filing for your own benefit. Also, whenever eligible for a Spousal Benefit, if you file for your own benefit deemed filing requires that you have also filed for the Spousal benefit. This can result in unexpected reductions to both types of benefit if you weren’t prepared for this.

*If born before 1954 and you’re over FRA, it is possible to file solely for Spousal Benefit while delaying your own benefit to a later date. If you file for a Spousal benefit before reaching FRA, deemed filing applies to you no matter what your date of birth is.

Keep in mind that the examples above denoted the wife as the spouse receiving the Spousal Benefit – but the roles could be reversed, depending upon the circumstances.

I hope this clears things up a bit. It’s a very confusing component to understand, but this should have helped to clear things up – let me know if you have any questions, as always!

Posted on Apr 10th, 2019

by author: jblankenship.

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Posted in: Deemed Filing, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: Social Security

Taxation of Social Security Benefits

Apr 1st, 2019

5 comments

You’d think that, after working all your life and now that you’re in a position to retire and start taking Social Security retirement benefits, that you could get a break and not have to pay income tax. But alas, Social Security retirement benefits may be taxable to you, depending upon your income level. And in truly typical bureaucratic style, it’s not a simple question to determine 1) IF your benefit is taxable; or 2) what rate or amount of your benefit is taxable; or even 3) what income is counted to determine if your benefit is taxable. (If you’d like to read some more about this subject, check out my book, A Social Security Owner’s Manual.)

Determining Provisional Income

In order to figger out if your Social Security benefit is to be taxed at all, we first have to calculate a relatively unknown sum known as Provisional Income (PI). What this boils down to is your Adjusted Gross Income plus any tax-exempt income, plus any excluded foreign income, plus 50% of your gross Social Security benefit. If you’re interested in just which lines on the 1040 return these are, here’s a list:

Form 1040 Line 1, 2a, 2b, 3a, 3b, and 4b, plus Schedule 1, Line 22, plus 50% of your Social Security benefit – these income lines are all added together.
Subtract the deductions (Schedule 1, Line 36) from the income items – if this number is zero or less, you don’t have to calculate any more. Your Social Security benefit is not taxable.
IF, on the other hand, you come up with a positive number after this calculation, this number is your Provisional Income.

Once you’ve determined the Provisional Income, you’re ready to look at the “Base Amount”.

Comparing to Base Amount

So you have your Provisional Income calculated, now you need to compare that number to the Base Amount for your filing status. So, if your filing status is Married Filing Jointly, your Base Amount is $32,000. If your filing status is Single, Head of Household, Qualifying Widow(er) or Married Filing Separately and you lived apart from your spouse for the entire calendar year, your Base Amount is $25,000. (Note: if your filing status is Married Filing Separately and you lived with your spouse at any time during the calendar year, see the special section at the bottom of this article for information about your benefit’s taxability.)

Okay – so now that you know your Base Amount, you compare that number to the Provisional Income number that you came up with previously. If your Provisional Income is less than your Base Amount – you can stop, because none of your Social Security benefit is taxable.

However (and there’s always a “however” in life, right?) if your Provisional Income is greater than the Base Amount – hang in there, you have some more figgering to do. And guess what? There’s more complexity involved! Yippee!

Incremental Amount

If you’ve determined that your Provisional Income is greater than your Base Amount. This indicates that some of your Social Security benefit is going to be taxed. This next calculation determines just how much of the benefit will be taxed. If your Base Amount is $32,000 (your filing status is Married Filing Jointly) then you have an Incremental Amount of $12,000. If your Base Amount is $25,000, then your Incremental Amount is $9,000.

When you subtract the Base Amount from your Provisional Income – is the figure you’ve come up with more or less than your Incremental Amount? If less, then 50% of the Provisional Income minus the Base Amount will be taxable, and you’re finished with calculations. (Don’t worry, we’ll work through a couple of examples to try to clear this up.) If the amount that you came up with was greater than your Incremental Amount, then at least 85% of the amount above the Incremental Amount plus the Base Amount will be taxed – but more calculations are required.

Final Calculation

If the amount of Provisional Income is in excess of your Base Amount plus the Incremental amount, which is your Excess Provisional Income, there is another calculation to complete. Take 50% of your Incremental Amount, and compare it to 50% of your overall Social Security benefit. Whichever number is smaller, add that number to 85% of your Excess Provisional Income. Then lastly, multiply your total Social Security benefit by 85%, and compare this number to the one you just came up with – whichever is smaller is the amount of Social Security benefits that is taxable.

Confusing enough? Let’s walk through a couple of examples to clarify.

Example 1 – Married Filing Jointly

1) AGI Excluding SS Benefits	$30,000
2) + Tax exempt interest	$1,000
3) = Modified AGI	$31,000
4) + 50% of SS Benefits	$10,000
5) = Provisional Income (PI)	$41,000
6) – Base Amount (BA)	$32,000
7) = Excess PI over BA	$9,000
8) – Incremental BA	$12,000
9) = Excess PI (if <0, enter zero)	$0
10) Smaller of line 7 or line 8	$9,000
11) 50% of line 10	$4,500
12) smaller of line 4 or line 11	$4,500
13) 85% of line 9	$0
14) Add lines 12 and 13	$4,500
15) SS Benefits times 85%	$17,000
16) Smaller of line 14 or 15 is your taxable benefit	$4,500

Example 2 – Married Filing Jointly

1) AGI Excluding SS Benefits	$50,000
2) + Tax exempt interest	$2,000
3) = Modified AGI	$52,000
4) + 50% of SS Benefits	$10,000
5) = Provisional Income (PI)	$62,000
6) – Base Amount (BA)	$32,000
7) = Excess PI over BA	$30,000
8) – Incremental BA	$12,000
9) = Excess PI (if <0, enter zero)	$18,000
10) Smaller of line 7 or line 8	$12,000
11) 50% of line 10	$6,000
12) smaller of line 4 or line 11	$6,000
13) 85% of line 9	$15,300
14) Add lines 12 and 13	$21,300
15) SS Benefits times 85%	$17,000
16) Smaller of line 14 or 15 is your taxable benefit	$17,000

Hopefully these two examples will clear things up a bit. If you are in one of the Single filing statuses, substitute your BA ($25,000) and Incremental BA ($9,000) where applicable.

Married Filing Separately, Having Lived With Your Spouse

If you have filing status of Married Filing Separately and you lived with your spouse at any time during the year, 85% of your Social Security benefit is always taxable. This is the maximum amount that can be taxed using the calculations illustrated above.

Posted on Apr 1st, 2019

by author: jblankenship.

5 comments already - add to the conversation!

Posted in: income tax, Social Security, tax.
Tagged: Social Security · tax

Credits and Deductions

Mar 29th, 2019

by sraskie.

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Let’s talk a little bit about tax credits and tax deductions. Both can be used to help reduce or avoid taxation but behave differently when it comes to doing so.

Tax deductions are beneficial because help lower the amount of your income subject to taxation. Deductions may be either “above the line” or for AGI, or “below the line” or from AGI. The line in the sand in this scenario is of course, AGI (adjusted gross income).

Above the line deductions are beneficial because they reduce gross income to arrive at AGI. A lower AGI may result in being able to take advantages of other benefits in the Internal Revenue Code (IRC) such as being able to contribute to a Roth IRA and qualifying for additional tax credits (discussed below).

Common above the line deductions include pre-tax 401(k) contributions, student loan interest, deductible contributions to a traditional IRA, HSA contributions, and self-employed business expenses (Schedule C).

Once AGI is reached, below the line deductions can be applied. Below the line deductions lower AGI further, to arrive at taxable income. Below the line deductions are going to come from either itemized deductions (Schedule A) or the standard deduction – a deduction everyone qualifies for and varies in amount based on filing status. You may either itemize or take the standard deduction, but you cannot do both.

If you itemize, you’ll use Schedule A. Common deductions on Schedule A include medical and dental expenses, home mortgage interest, state and local taxes, and charitable contributions. Some deductions on Schedule A (such as medical and dental) are subject to a floor of AGI. An AGI floor means that the expenses may be deducted once they’re higher than the floor. For example, if your AGI is $100,000 and the deduction has a floor of 10%, then any expenses above $10,000 would be deductible.

Once all deductions have been taken, you arrive at your taxable income. It’s here where the applicable tax rates are applied, and your tax is calculated. However, you may still benefit from tax credits.

Tax credits reduce the amount of tax owed on a dollar-for-dollar basis. Whereas deductions reduce taxable income, credits lower the amount of taxed owed. For example, if you owe $2,000 in taxes but have $1,500 worth of credits, then your net taxed owed would be $500. In some instances, your tax credits may eliminate any taxes owed. In fact, you may even qualify for a refund based on your credits exceeding the tax you owe (called refundable or partially refundable credits).

Naturally, the specific credit(s) you may qualify for depends on your situation. For example, parents can take advantage of the child tax credit, American opportunity tax credit, child and dependent care credit, and the earned income tax credit. Other credits you may be eligible for are the lifetime learning credit, saver’s credit, adoption credit, and residential energy credit.

To see what credits and deductions make the most sense for your situation, talk to a tax professional such as a CPA that specializes in taxes, an EA, or tax attorney. You don’t want to leave money on the table or pay more tax than required.

Posted on Mar 29th, 2019

by author: sraskie.

Posted in: income tax, income tax credit, refunds, saver's credit, tax, tax credits, tax deduction, tax deferral.

IRD from an IRA

Mar 27th, 2019

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Photo credit: diedoe

The topic of Income in Respect of a Decedent (IRD) can be a particularly confusing aspect of the tax code – but it doesn’t need to be. Put simply, IRD is any income that a decedent (the person who died) would have received had death not occurred – that has NOT been included as income on the individual’s final tax return. In essence, this rule provides that certain items in the estate, specifically income items, do not receive a step-up in basis. This income has to be accounted for on one of three tax returns:

estate
beneficiary’s income tax return (whoever received the income)
other assignee of right to the income besides a beneficiary

If you are the beneficiary of an IRA and are required to include some IRD on your tax return, you may be eligible for a special IRD deduction. This deduction is limited to any estate tax that was paid on the income received in respect of the decedent. This would have to be a significantly-sized estate, since the applicable exclusion amount for 2019 is $11.4MM.

It is important to note that the IRD deduction is only available for federal estate tax – your state estate tax may or may not be deductible, you’ll need to check that with your state authorities.

IRD from an IRA

From an IRA, IRD includes any income that you receive that was included in the gross estate. Any growth that occurs after the date of death of the original owner becomes income to the beneficiary, and therefore is not IRD. Any estate tax that can be attributed to that IRD is deductible as a miscellaneous deduction on Schedule A of Form 1040 – this deduction is NOT one of the miscellaneous deductions that was eliminated with TCJA 2017. If the IRA had basis – that is, if the IRA included non-deductible contributions – then those contributions are not taxed to the beneficiary as IRD. Income tax has already been assessed on these amounts prior to contribution.

Roth IRA Nuances

For a Roth IRA, the IRD only includes income received via non-qualified distributions, and then only the portion that represents growth in the account. The main way that you could get caught by this one is if the IRA has not been established for the required five-year period prior to the death of the original owner. Any income (growth) in the account up to the date of death is IRD, the contributions are tax-free, and any growth after the date of death is income to the beneficiary (and not IRD).

IRD Deduction

To calculate the IRD deduction, you need to know the amount of the taxable estate, the amount of tax paid on the estate, and the value of the IRD item(s) in the estate. As an example, we’ll say we have an estate valued at $15MM, and an IRA worth $1MM. On the entire estate, we paid tax of $1,440,000 (40%).

Next, we calculate the estate tax on the value of the taxable estate without the value of the IRA – and we come up with $1,040,000. So the estate tax attributable to IRD is $400,000, or 40% of the IRA value. So, as distributions are made from the IRA, you can claim a deduction of 40% of each distribution until the entire $400,000 attributed estate tax is used up. This deduction offsets (in theory) the fact that you must include the distribution as ordinary taxable income.

Once again, this is not an activity for the faint of heart. I suggest working closely with your tax pro to make sure that you’re calculating things correctly – it can amount to some sizeable tax issues if you’ve fouled it up somehow.

Posted on Mar 27th, 2019

by author: jblankenship.

Posted in: income in respect of decedent, IRA, IRD, tax.
Tagged: IRA · tax

How to Check the Status of Your Tax Refund

Mar 25th, 2019

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tax refund So – you’ve gone through the effort of filing your tax return, or maybe you went to a tax preparer and your return has been filed. You see that you’re going to be getting a sizeable refund this year – in spite of your careful planning – and you’re anxious to get your hands on it! How can you check on it to see what’s going on with it??

Go Online (where else?)

First of all, you can go to the IRS’ website at www.IRS.gov and access the interactive tool called Where’s My Refund (also available in Spanish as ¿Dónde Está Mi Reembolso?), which will give you quick, accurate information about your refund. From the IRS.gov front page click on “Refund Status” to get to the tool.

After you’ve eFiled (or had the return eFiled for you) you can get information about the refund 72 hours after the IRS acknowledges receipt of your return. If you file a paper return, the refund information will not be available online for three to four weeks after you’ve mailed the return.

In order to check on the status of your refund, you’ll need to have a few items with you (so don’t try this on the train):

Your Social Security number or ITIN
Your filing status (Single, Married Filing Jointly, Married Filing Separately, Head of Household, or Qualifying Widow(er))
The EXACT whole dollar refund amount shown on your return

Once you’ve plugged all that into the system, you might get several responses. For example, the system may simply tell you that your return has been received and is being processed. Or, you could receive the mailing date or direct deposit date of your refund. Or, if you’re really unlucky (or maybe you have enemies in the Post Office), you may find that the IRS could not deliver your refund due to an incorrect address. In that case, you may be able to correct or change your address online.

If there happens to be an issue with your particular situation, the online system may give you some options to work with to resolve those situations. An example would be if you have not received your refund within 28 days from the original mailing date (per IRS records), you can initiate a refund trace using the system.

If you don’t happen to have internet access, you can always call the IRS refund hotline at 800-829-1954. You’ll have to have the same information listed above (Social Security number, filing status, and exact whole dollar refund amount) to use the phone system as well.

A little insiders’ tip: refund checks are normally mailed on Fridays. If you check the status of your refund and don’t find a mailing date, it won’t do any good to check again until after the following Friday.

Posted on Mar 25th, 2019

by author: jblankenship.

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Posted in: income tax, income tax refund, tax.
Tagged: tax

Missing a W2? Here’s What to Do…

Mar 20th, 2019

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missing a w2 So – you’re all set to do your taxes. And then… you realize you’re missing something. One of your W2’s hasn’t shown up in the mail. Maybe it was a short-term or a part-time gig, or maybe the business changed hands – or maybe it just got lost in the mail.

Whatever the reason, you’re missing one of the documents that you need in order to prepare your tax return. So what do you do?

What Do You Do?

Your employer is required to send your W2 earnings statement to you by February 1 for the prior year’s earnings. But sometimes things go awry, and you don’t receive the form. There are four steps to follow to retrieve the required information…

Contact your employer – inquire if and when the W2 forms were mailed out. It’s possible that the postal service returned it to your employer due to an incorrect or incomplete address. Even if it hasn’t been returned, your employer should be able to produce a new copy of the form and send it out to you.
Contact the IRS – the IRS receives a copy of all W2 forms filed. Wait until after February 16, and then you can call the taxpayer assistance line at 800-829-1040. Make sure you have as much information about the earnings as possible – including your employer’s name and address, your dates of employment, and an estimate of your earnings (you can get this from your end-of-year pay stub). The IRS should be able to produce the appropriate information for you or direct you to the steps you need to take.
File your return – on time if you can, or with a timely filed extension request, even if you have not received the W2. If you have taken the first two steps and still have not received the form by April 15, use Form 4852, “Substitute for Form W2, Wage and Tax Statement”. Attach Form 4852 to your return, using your last pay stub to estimate your earnings and withholding taxes. Keep in mind that using Form 4852 may delay any refund due to additional processing required.
File an amended return – if you happen to receive your W2 after you’ve filed using Form 4852 and the W2 includes different information than you used to prepare your return. Use Form 1040X to file this amended return, within 3 years of the original return deadline.

You can find the forms mentioned above on the IRS website.

Posted on Mar 20th, 2019

by author: jblankenship.

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Posted in: income tax, tax.
Tagged: tax

Why track expenses?

Mar 18th, 2019

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One of the primary things that we suggest to clients is to track expenses. In some cases, this means noting down each expense as you make it, daily, so that even the incidental cash outlays are tracked.

Another way to do this is to use an automated method, one of the many apps available, to monitor your expenses through your credit card and bank accounts.

Either way, when you track expenses there are a couple of outcomes that can have a positive influence on your financial life.

The first is that you become more aware of each outlay of money, whether in cash or from a credit card. Since you track expenses they don’t just pass by, they have a record that you can see and refer to. That coffee you bought on a whim has a life now, and you can see the impact that the purchase had on your life.

The second positive outcome is that once you track expenses and summarize them, you begin to see a picture of your priorities. Whatever you’re spending money on is a priority, and the more you spend, the higher the priority.

These are also reasons why the concept of bullet-journaling is so popular and effective. If you track your every activity on a day-to-day basis, you have a record of all the things you spend your time on. And, as when you track expenses, you can review the history of your time spent – showing your priorities in terms of time. Whatever you spend your time on is a priority, and the more time you spend, the higher the priority.

Knowing where your priorities are historically gives you a chance to address these priorities for the future.

And since you’re taking note of your spending (in time or money) regularly, you can make decisions about how that spending is done. In some cases the decision can be made in the moment – deciding not to spend your precious time or money on that particular item – or making long-term decisions about spending time or money.

For example, you might make the conscious choice to no longer spend time with repetitive tasks by automating or outsourcing. And when you track expenses, you might make decisions about trimming back or eliminating frivolous incidentals, like lottery tickets.

The point is, whether you track expenses or track your time, summarizing this historical record gives you the opportunity to make decisions about how you spend those precious resources in the future. You can control your priorities only if you pay attention to what they actually are.

Posted on Mar 18th, 2019

by author: jblankenship.

Posted in: budgeting, financial planning, priorities.

Taxation of Income, Capital Gains, and Interest

Mar 15th, 2019

by sraskie.

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When you receive income, it’s likely going to be subject to taxation. However, the type of income will determine the specific tax treatment, and ultimately determine how much you get to keep.

We can break income down into three basic types: ordinary income, capital gains income, and interest income. Here’s a breakdown of each.

Ordinary Income – Ordinary income (OI) is income received that is subject to ordinary income tax rates. These tax rates are the rates individuals pay on incremental amounts of income. Rates can be as low as 10% and as high as 37%. Income typically subject to OI rates is income from your wages (W2, self-employment), taxable bond interest, taxable retirement income, and annuity income.
Capital Gains Income – Capital gains income occurs from the sale of assets such as stocks, bonds, mutual funds, ETFs, real estate*, and other assets. Depending on how long the assets were held determines if capital gains are taxed at OI rates or more favorable long-term rates. Assets held for one year or less and then sold, have any gain subject to OI rates. Asset held longer than one year and then sold have gains taxed at long term capital gains (LTCG) rates – which are either 0%, 15%, or 20% – depending on your total income. The higher your total income, the higher the LTCG rate you’ll pay. Qualified dividends from stocks are generally taxed at the favorable LTCG rates.
Interest Income – Interest income is income from assets that generate interest such as bonds, savings accounts, CDs, treasuries (savings bonds, T-bills, etc.), and money market accounts. In most cases this income is taxed at OI rates. One exception is interest from municipal bonds issued by city or state governments. Interest on these bonds is not taxable at the federal level and may avoid state and local taxation as well.

Knowing how specific income is taxed can help with the process of where to hold specific assets and in which accounts – called asset location (discussed later). This can improve your tax efficiency. Additionally, capital losses (selling an asset for less than you paid for it) may be used to offset other income, also improving tax efficiency.

These are the basics of income. Naturally, there are going to be exceptions and complexities that may apply to you. To avoid costly mistakes, you may benefit from the advice of a tax professional -usually a CPA who specializes in tax, an Enrolled Agent (EA – enrolled to represent taxpayers before the IRS), or a tax attorney. *Gains on the sale of your primary residence may not be taxed up to $250,000 for single and up to $500,000 for married tax filers. Specific rules app

Posted on Mar 15th, 2019

by author: sraskie.

Posted in: capital gains tax rates, income tax.

IRA Inheritance – Not Taking Timely Distributions

Mar 13th, 2019

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Photo credit: diedoe

A comment on the post about splitting inherited IRAs sparked this particular post – the question was “What are the consequences for not re-titling an inherited IRA as F/B/O?” You can see my response to that specific question at the original article…

But the question sparked the idea of discussing what happens when a beneficiary doesn’t act in a timely fashion with regard to taking Required Minimum Distributions from the inherited IRA?

The Inheritance

So, let’s say you inherited an IRA from your mother – this was her own IRA that she had contributed to or rolled over funds from a qualified plan at some point. Your mother designated you as the sole primary beneficiary. Things get really hectic and confusing after the death of a parent, and sometimes we don’t cover all of the bases properly… In this example, you didn’t realize that you needed to begin taking Required Minimum Distributions (RMDs) from your inherited IRA as of December 31 of the year following the year of your mother’s death. As of now, for example’s sake, let’s say we’re in the fourth year after your mother’s passing. (see Notes below)

At this point you have two choices:

take the entire balance of the IRA as a distribution before the end of the fifth year; or
“unwind” the mistake by taking your RMDs for the first four years, paying the 50% excess accumulations penalty on each distribution, and then continuing on with your lifetime RMDs.

In each case, of course, you would be required to pay ordinary income tax on the distributions.

Five Year Distribution

This is the “default” distribution option – and the rules are that you must take the complete distribution (either a series of payments or a lump sum) within five years following the year of the original IRA owner’s death. In the example we’ve started, this means that you have roughly a year to complete the distribution.

Since ordinary income tax is owed on distributions from your inherited IRA, if the balance is significant this could represent a sizeable tax bill for you. It might even put you into a higher (or much higher) tax bracket, causing lots of unnecessary additional tax – versus taking the other route, unwinding the mistake.

Unwinding the Mistake

In order to avoid the excess taxes described above in the Five Year Distribution, you would need to go back and take distributions for the three prior years that you missed, based upon your Table I factor. For example, let’s say your inherited IRA was worth $100,000 at the end of the year in which your mother passed away, and your age in the following year was 28. According to Table I, your life expectancy is 55.3 years. Dividing the IRA balance by 55.3 gives us a RMD of $1,808.32. That’s your first year’s distribution.

Continuing the example, you subtract 1 from the Table I value, along with the balance of the IRA at the end of the first year (minus $1,808.32) to come up with the RMD for the second year. For the sake of the example we’ll assume that the IRA is growing at a fixed rate of 5% per year, and so the balance at the end of the second year is $105,000. Subtract $1,808.32 from that figure to come up with an end of year balance of $103,191.68. Your Table I factor is 54.3, yielding an RMD of $1,900.40.

For the third year, your IRA has now grown to $110,250. Subtracting your two years’ worth of RMD leaves you with $106,541.28, and your Table I factor is 53.3, giving you an RMD for the year of $1,998.90.

Adding these three years’ worth of RMDs together equals $5,707.62, which you’d take out in a distribution for the prior (missed) years. This amount is subject to ordinary income tax (just like your other income), but is also subject to a special tax on “excess accumulation”. This tax is for failure to take RMDs in a timely fashion, and amounts to 50% of the distribution that was required, or $2,853.81. While you could take this amount out as an additional distribution, keep in mind that you’d also have to pay ordinary income tax on that amount – but at least you wouldn’t have to pay the 50% penalty on it. You’d probably be better off just paying half of what you take out in the RMDs, since you hadn’t had that money in your hands anyhow.

For the current (fourth) year, you would also need to take a RMD – and continuing our example your IRA balance at the end of last year was $115,762.50 – from which you would subtract the RMDs of $5,707.62, leaving $110,054.88. Your Table I factor is 52.3, which provides you with an RMD of $2,213.43, which you need to take as a distribution by the end of the year. (You’ll need to continue this RMD calculation process for each year hereafter until your death or the IRA is fully distributed. You can always take a larger distribution, but you have to at least take the minimum.)

Don’t Try This At Home, Kids

I know I’ve cautioned you about this before, and perhaps you see it as self-serving (tax guy recommends a tax guy, duh!) but you can really cause yourself some extra grief if you foul this one up. It would be worth it to have a tax professional review your calculations at the very least. To tell the truth, you’re probably just as well to have the tax guy do the calculations for you because the cost is likely about the same for him to review your work as to do it himself. The tax pro can help you with the required filing of Form 5329 (to account for the excess accumulation tax) as well. In addition to the tax, interest may be owed as well on the accumulation tax due in prior years.

Notes:

It should be noted that the fact that the decedent in the example is your parent is not critical to the facts of this explanation – only that you are inheriting the IRA from someone other than your spouse. A spousal inheritance is a different animal altogether.

A factor of this example that IS important is that the IRA belonged specifically to the decedent (your mother) and is not an IRA that she inherited from someone else. If you’ve inherited an IRA that was already an inheritance, if it was specifically directed to you as the designated contingent beneficiary then the rules are the same. But if you received the IRA via the estate (because you were not named as a beneficiary on the IRA documents), you’ll have to follow the five-year distribution rule exclusively.

Lastly, it is also important to note that the example only identifies a single primary beneficiary – if there is more than one beneficiary, the process described would be complicated by the fact that the oldest of all the beneficiaries (with the smallest Table I factor) would be the one whose distribution period is used for all beneficiaries, since the IRA was not split by the end of the year following the year of the death of the original owner.

Posted on Mar 13th, 2019

by author: jblankenship.

1 comment already - add to the conversation!

Posted in: Early Distribution, financial planning, IRA, minimum distributions, retirement plan, rmd, rmds, tax.
Tagged: financial planning · IRA · retirement plan · tax

What’s Up With Medicare Premiums? How Increases Are Determined

Mar 11th, 2019

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If you are covered by Medicare, you may be wondering how the premium increases are determined. Sometimes there is no increase, and sometimes there’s an increase for some enrollees but not others. And some folks have to pay way more than everybody else.

To understand this quandry, we need to look at the system for determining increases to Social Security benefits first.

Social Security – No COLA Increase for 2015

Let’s look at how it worked the last time there was no COLA. This is how future zero-COLA years will work as well.

For the year 2015 there was no Cost-Of-Living Adjustment (COLA) in Social Security benefits. This occurred because the Consumer Price Index (CPI) had not increased for the prior year (2014). While the COLA figures don’t parallel the CPI exactly, the CPI is a rough guide to follow when determining increases.

This was the third time in seven years that there was no COLA – before that, there was an automatic increase in benefits every year since 1975.

Impact to Medicare Premium

So what does this mean for Medicare premiums? Well, for most folks (about 75%) receiving Social Security, since you are already receiving Medicare Part A for no premium, there is no change. Since your Part B premium is linked to the COLA for Social Security, it remained unchanged for 2015. What isn’t linked to COLA is Part D drug coverage, so this increased for most all beneficiaries.

In the future, if there is another zero-COLA year, Part B premiums will likely enjoy similar treatment (unless the rules are changed).

The Other 25%

How can you know if you’re in the 75% that will have unchanged Medicare Part B premiums or the “other” 25%? One of the following three circumstances puts you into the “other” 25%:

You don’t have Medicare Part B premiums deducted from your Social Security checks;
Your first year of Medicare benefits is the year when there is no COLA for Social Security; or
You make too much money, and are subject to IRMAA rules.

The first one seems pretty simple, but it’s more complicated than it seems. For nearly all Social Security recipients, deduction of Medicare Part B premiums is compulsory.

But there’s another, larger group that is enrolled in Medicare Part B that are not currently receiving Social Security benefits. Therefore, individuals who are not receiving Social Security benefits cannot have Medicare Part B premiums deducted from their checks. So this group is in danger of increased Medicare Part B premiums when most other enrollees are enjoying a premium increase holiday.

When these folks eventually apply for Social Security benefits, Medicare Part B premiums will be deducted from their checks – and they’ll be in the special 75% group that may (depending upon COLAs) enjoy a year or so with no increase to premiums. But this won’t apply to the first year of Social Security benefits – only after you’ve received benefits in one calendar year and received a COLA increase does this rule apply.

The second circumstance is cut-and-dried: since this is your first year of receiving Medicare, there was no previous benefit to apply an increase to. So you just have to accept the current standard premium, with no limitation for you. That is, unless you make too much money, because then the third provision applies to you.

So, what’s too much money? Medicare Part B premiums start to increase when your income is more than $85,000 for single filers, or $170,000 for joint tax filers. At this level, your Part B premium will increase by $54.10 per month, an increase of roughly 40% over the standard 2019 premium of $135.50.

As your income increases, the Part B premium increases as well, up to a maximum premium increase of $325 per month if your income is above $500,000 for single or $750,000 for joint filers.

Summary

For the majority of Social Security recipients, the overall impact is minimal, if not a positive.

This is not to downplay the significance, especially to low-income seniors who rely almost exclusively on Social Security benefits, as many other costs (energy costs, food, housing, etc.) have increased, plus the value of home real estate has decreased dramatically. These factors taken together can have a devastating impact on folks who have no other “safety net” available to them. If you’re not presently in the position to have these concerns, you should take this information as a warning: it is critical to develop additional resources to be ready and available in the case that subsidized sources of income are not available or are limited when in retirement.

Posted on Mar 11th, 2019

by author: jblankenship.

Posted in: cola increase, cost of living adjustment, Medicare, medicare, medicare costs, medicare part b, medicare part b premiums, Social Security, social security benefits, social security checks.
Tagged: Social Security

Defined Benefit Pensions

Mar 9th, 2019

by sraskie.

3 comments

A defined benefit pension is a type of retirement plan that your employer may offer as the only plan offered, or in conjunction with a 401(k) plan. If you have access to a defined benefit pension or are currently participating in one, you are in rare company as these types of plans are becoming few and far between.

Defined benefit pensions are different from 401(k)-type plans (called defined contribution plans) in several ways. One of the biggest differences is the fact that the employer is responsible for the funding of the plan in addition to accepting all the investment risk of the plan’s assets. With a 401(k)-type plan, the employee is responsible for funding and the risk in the investment portfolio. Many defined benefit pensions are also backed by the Pension Benefit Guarantee Corporation (PBGC), which protects your pension up to a certain amount in event of plan termination.

Another difference is that at retirement, the defined benefit pension pays the retiree a guaranteed income stream for life (an annuity), and that guaranteed income may or may not have an inflation increase. If you’re married, by law the pension must be paid as a joint and survivor annuity – meaning that if the spouse who has the pension dies, a benefit is still paid to the surviving spouse.

With a 401(k)-type plan, the account balance at retirement is based on the employee’s contributions (and any employer match) and how it was invested. At retirement, the retiree is responsible for taking income from the account. They may choose to take periodic withdrawals, fund an annuity, or leave it invested should they not need the money just yet.

The key point is the employee is responsible for these decisions. With a defined benefit plan, the decisions are already made, and if not, are very simplified.

The amount of the retirement benefit from a defined benefit pension is generally based on length of service, age, and final average salary. Thus, the longer you work and are participating in the pension, the higher the monthly benefit. Usually, companies will cap the years of service credit at some number such as 30 years – which means there’s no increase in the pension based on working longer. Most companies allow employees to become “vested” (the pension is fully the employee’s) after 5 years, sometimes less.

If you work for a company offering a defined benefit pension and are considering changing jobs, see if the new company has a defined benefit pension (among other benefits). Also check to see if you’re vested in the current pension. If not, consider staying until you are. Even a small pension can make a difference in retirement. Naturally, this won’t be your only criteria for staying or leaving but it’s important. Imagine receiving a guaranteed retirement income where no matter what happens, you’ll get the same payment every month. Regardless of how the economy is doing, and regardless of your 401(k) or IRA performance, you’ll get the same monthly amount. This is the beauty of a defined

Posted on Mar 9th, 2019

by author: sraskie.

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Posted in: pension, retirement, retirement plan.

Splitting Inherited IRAs

Mar 6th, 2019

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Photo credit: diedoe

In the case of an inherited IRA, splitting it often is desirable in order to better accommodate a distribution plan after the primary owner dies. This can be done prior to the death of the IRA owner, or it could be done after the death of the IRA owner, as long as it’s accomplished before the end of the year following the year of death.

Why is this important?

When an IRA is inherited by a non-spouse individual, that individual is required to begin taking distribution of that IRA. The required distribution is based either upon the heir’s age or the age of the decedent. In most cases when the beneficiary is younger than the decedent, it is more advantageous to stretch those payments out over the longer period of time by using the heir’s age for the required distribution.

If there is more than one beneficiary, unless the IRA is split, the Required Minimum Distributions (RMDs) will be based upon the attained age of the “designated beneficiary”. This is the oldest living beneficiary as of September 30 of the year following the year of death of the primary IRA’s owner.

You can split the IRA into separate IRAs for each beneficiary, each titled as “John Jones, deceased, FBO Jane Brown” (probably not exactly like that because the names will be different in almost all cases). Then the individual IRAs can be distributed according to the age of each individual beneficiary. Splitting the IRA must be completed by December 31 of the year following the year of death.

Note: you don’t have to split the IRA into separate IRAs by September 30 of the year following the year of death. This is just the administrative date for determination of the designated beneficiary. If you split the IRA into separate inherited IRAs by December 31 of the year following the year of death, then administratively the designated beneficiary of each separate IRA as of September 30 would be the individual heir owner of the account.

Splitting the IRA into separate IRAs for each intended heir before the original owner dies simplifies matters for the heirs. By splitting the IRA before death, the inheritants can simply take RMDs based on their own attained age, and nothing else is required (no account splitting, no deadlines to meet). But if this isn’t (or can’t be) done, splitting the IRA after death is usually best for all involved.

Posted on Mar 6th, 2019

by author: jblankenship.

Posted in: Early Distribution, IRA.
Tagged: IRA

You’re Not (necessarily) In Control

Mar 4th, 2019

by Jim.

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So you’ve set up your 401k with your employer’s administrator, made your allocation choices, and everything is set to go. You’ve got this retirement saving thing by the tail, right?

Photo credit: jb

Not so, Mona Me. (or maybe that’s mon ami?) Or at least not completely so. You see, way back in 2006, Congress passed the Pension Protection Act, which had a provision in it that allows employers to automatically enroll employees in retirement plans, and make default investment choices for them.

Doesn’t apply to me, right? Since I enrolled on my own and made my own choices for allocation of my investments… right? Once again, Mona, you’re not completely correct.

The Most Common Change

The plan sponsor (your employer) can make changes to the funds available for investment choices at any time. So, instead of that no-load broad market fund that you originally chose, now you have a loaded (yes I know they’re usually waived loads in 401k’s) high expense ratio fund that doesn’t really accurately represent the total domestic equity market very well.

Your employer can make this change any time they want – maybe it’s to get their cousin an additional commission since he sold the plan to your employer. But then again, maybe it’s just because the bossman read an article that said A shares were superior to all other investments, or something equally idiotic.

The Other Kind

Another possible way that your employer could change your allocation in your 401k account is if it was determined that your account wasn’t diversified enough. Seems pretty big-brotherish, but it’s still a possibility, just not very common.

Default investments can be changed on a whim as well – from a basic money market account to, perhaps, a costly stable-value insurance product. When these choices are changed, your money is automatically moved. You can always change to something else (among the available options), but you have to make the change on your own.

The Bottom Line

So – the watchword you should take away from this is that you need to pay close attention to communications that you company sends you regarding your retirement plan. None of these changes can be made without communicating the change to you in advance – but if you are like most folks when you get that pack of paper and the book written on recycled cigarette paper, the last thing you want to do is sit down and study it thoroughly, right Mona?

Particularly pay close attention when your company sends you a letter explaining changes to the plan. These are supposed to be concise and easy-to read, so watch for them. When funds are going to be automatically moved you’ll get a notice in advance so that you can choose something different from the default. This may be helpful, or it may not – but you’ll be in a position to have better control over your funds.

Posted on Mar 4th, 2019

by author: Jim.