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

Posted in: Early Distribution, IRA, retirement plan, tax.
Tagged: IRA · retirement plan · tax

Report pension changes to SSA

Aug 6th, 2018

2 comments

When you have a non-SS-covered pension and you are receiving Social Security benefits, either WEP (Windfall Elimination Provision) or GPO (Government Pension Offset) may impact your benefits. It’s important to keep the Social Security Administration (SSA) up-to-date on your pension. You must report pension changes to SSA when there is an increase due to a COLA or any other change to the previously-reported amount. This requirement is in place so that when your pension changes, your WEP and/or GPO impact can be recalculated.

This is only required if the pension changes are for a pension that is based on your own non-Social Security-covered earnings. If you’re receiving a pension based on SS-covered earnings, or a pension from any source that is based on someone else’s earnings (such as a survivor pension), there is no need to report pension changes to SSA.

This reporting can be accomplished by sending a letter to the Social Security Administration. The letter should detail the name, address, birthdate and Social Security number of the pension recipient, as well as the change in the pension amount and the effective date of the change. This letter can be delivered to your local Social Security Administration office.

Most commonly, GPO is the calculation that is affected by a change to the pension amount. WEP is only dependent on the amount of the pension when the pension amount is relatively small – which we’ll review a bit more later. Let’s take a look at an example of the impact of a change to pension on GPO.

How pension changes impact GPO calculation

For example, Gloria is receiving a pension due to her work for the local health department, in the amount of $1,800 per month. Her husband, Edward, died this year. Before Edward died, he was receiving Social Security benefits in the amount of $2,000 per month. When Gloria filed for the survivor benefit based on Edward’s record, she was informed that GPO would reduce the survivor benefit. This is because of her pension from the local government.

The reduction is 2/3 of the amount of Gloria’s pension – which calculates to $1,200 per month. The pension is $1,800, multiplied by 2/3 equals $1,200. So the resulting GPO-reduced Social Security survivor benefit is $800.

Gloria’s pension increases by 3% each year. So in January, her pension increases to $1,854 per month. Gloria must report this increase to Social Security. When she does so, her GPO impact will be recalculated. The result is that the GPO impact is now $1,236 per month. The survivor benefit increased 2% for the year (annual COLA), bringing the unreduced benefit to $2,040. When the GPO reduction is applied, the final resulting benefit is $804.

How a change to pension impacts WEP calculation

WEP is different from GPO, in that it is only based on the amount of the pension when the pension itself is relatively small. In order for the amount of the pension to be important, the pension itself must be less than the maximum WEP impact – 50% of the first bend point, or 50% of the PIA if the PIA is less than the first bend point.

Jeff has had a limited working career due to debilitating illnesses throughout his life. Part of his career included teaching for several years before his illness took hold. This work as a teacher was not covered by Social Security, but it has generated a pension in the amount of $400 per month. In addition to the teaching time, Jeff had several part-time jobs off and on throughout his life, which has generated a Social Security retirement benefit in the amount of $800 per month.

Since WEP reduction is calculated as the smaller of either 50% of the first bend point, 50% of the unreduced Social Security retirement benefit, or 50% of the amount of the non-covered pension. In Jeff’s case, $816 is amount of the first bend point, since he reached 62 in 2014. So the smallest figure of the three is 50% of Jeff’s pension – which makes his WEP reduction $200, for a resulting Social Security benefit of $600 per month.

When Jeff’s teacher’s pension receives an increase of 4% due to pension fund experience, he must report it to SSA. This will increase his WEP impact to $208, since his pension was increased to $416. After the annual Social Security COLA increase of 2% (to $816 per month), his resulting WEP-reduced benefit will now be $608.

If Jeff’s pension was larger than one of the other WEP-reduction factor limits, it wouldn’t make any difference to the WEP calculation to reduce his Social Security benefit.

Posted on Aug 6th, 2018

by author: jblankenship.

Posted in: government pension offset, GPO, Social Security, wep, windfall elimination provision.
Tagged: gpo · Social Security · WEP

Is It Really Cheating?

Aug 3rd, 2018

by sraskie.

1 comment

In the past we’ve written about financial autonomy, spending a little on yourself, and balance between saving and spending. Although it been a while, we’ve also brought up health and fitness axioms from time to time – mainly through shameless self-promotions of my book (designed to cure insomnia while doubling as a doorstop).

Today I wanted to stress the importance of balance in your personal finances as well as your health. One of the ways I’ve found to keep me keep balance is cheating. Cheating? It’s not as bad as it sounds. Although having a negative connotation, the concept is what can help maintain balance. Here’s how.

In my book, one of the axioms I present is having a cheat day when it comes to healthy eating. What is a cheat day? A cheat day is a day you set aside (mine are usually Sundays) every week where you eat whatever you want, whenever you want, and as much as you want. It’s certainly not a concept that I invented. Many athletes and non-athletes utilize this day as part of their health and fitness regimen.

The reason why is important. For six days a week, an individual is working their butt off (maybe literally) exercising, making good food and meal choices to get into or maintain a desired level of health and fitness.

Having a cheat day allows the individual to relax a bit when it comes to eating, enjoy that dessert, buffet, never-ending-pasta-bowl, or whatever their specific indulgence is. In other words, having one day per week to eat whatever we want allows us to stay focused the other six days of the week.

It can also prevent binging – going weeks or months without a dessert or sweet, only to binge for days and then feel guilty and give up on our goals. After all, it’s only a six day wait until the next cheat day!

A similar concept is true for our personal finances. Setting aside some money every paycheck for ourselves to spend however we want, whenever we want can also help us stick to our long-term financial goals of saving for retirement, college, or getting out of debt.

Although this amount of money may not be significant, the autonomy it gives us is very powerful. Having a little money to spend on whatever we want can keep us focused mentally on the bigger picture, without feeling that we are losing control or a slave to our financial goals.

Here’s where the cheating comes in. At first, when people make great strides in their fitness and financial goals, the thought of spending on something not in the “big picture” or eating foods that they know aren’t healthy can be daunting. It seems counterproductive. It seems like cheating.

But it’s necessary. Having some financial and food autonomy is a necessary part of the plan. It allows us to stay focused on our long-term goals while allowing us the freedom to enjoy indulgences here and there without feeling guilty.

Posted on Aug 3rd, 2018

by author: sraskie.

Posted in: financial planning.

The Deadline for Spousal IRA Rollover

Aug 1st, 2018

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clock top by laffy4k You’re going through a lot, having to deal with your spouse’s passing… and you have plenty of decisions that have to be made with regard to handling his or her final affairs. All of the financial stuff must be dealt with as the will or probate determines, and you (or the estate’s representative) have to work through all of those arrangements. It’s difficult to deal with all of these things, but you have to do so. But there’s a bit of good news for you: you don’t have a deadline for spousal IRA. You can take your time dealing with the IRA(s) that you have inherited yourself.

The Spousal Inherited IRA

If you’ve inherited an IRA from your spouse, you have several choices in how to deal with it. But the thing about it is, you’re not required to do anything immediately. You can leave this account alone and do nothing with it at all for the present. (see Note below for complications)

Of course, if you do nothing with the account, you can choose to begin taking Required Minimum Distributions (RMDs) immediately – but this doesn’t have to occur either. If you simply leave the account as it is and do not take any RMDs from the account, it will automatically be considered your own IRA by default, and you can treat it as such, making contributions, etc., and taking distributions when allowed. But there’s nothing that requires you to do anything.

On the other hand, you could treat the IRA as inherited – and begin taking distributions from it without penalty. This might be advantageous to you if you are under age 59 1/2 and you need access to the money right away.

Note: A complication comes about when the IRA is bequeathed to any other person or entity in addition to the spouse of the original account owner. This would apply if the spouse and children are splitting the account, or if part of the account is to be transferred to a charity or a trust, for example. In a case like this, you would need to split the account to the other heirs first, leaving your spousal portion as a remainder in order to treat the account as described above. This has to be completed by the end of the calendar year following the year of the original account owner’s death.

Posted on Aug 1st, 2018

by author: jblankenship.

Posted in: inherited IRA, IRA, retirement plan.
Tagged: IRA · retirement plan

Medicare Late Enrollment Penalty

Jul 30th, 2018

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Photo credit: jb

When you sign up for Medicare after your initial enrollment period, oftentimes there will be a late enrollment penalty. This applies to any Medicare Part B as well as if you’re required to pay for Medicare Part A, if you did not enroll in the initial enrollment period. There may be a waiver of the penalty in some cases, so all is not necessarily lost at this stage. However, the longer you wait the more your penalty may be.

Part B late enrollment penalty

Part B must be started during your initial enrollment period (in most cases) or you will be hit with a late enrollment penalty. This penalty applies for the remainder of time that you are covered by Part B.

The penalty is 10% for each full 12 month period that you delay enrollment. For example, if your initial enrollment ended on September 30, 2018 and you wait until the annual period for 2020 (ending March 31, 2020), you will have a Part B premium penalty of 20%. Even though 30 months passed since the end of your initial enrollment period, only two 12-month periods passed, so the penalty is 20%.

This means that your Medicare Part B premium for 2020 would be 120% of the then-current “standard” Medicare Part B premium, which is $134 in 2018 (120% of $134 would be $160.80, an increase of $26.80 per month). Medicare premiums are increased annually for most enrollees.

The penalty stays with you for as long as you have Part B coverage – there is no way to eliminate or reduce the penalty. However, if you have had employer medical insurance (as an active employee, not a retiree) during the period from your initial enrollment period, you may not have the penalty applied. This is true if your employer plan covers 20 or more employees and is considered “creditable” coverage.

Part D late enrollment penalty

As with other parts of Medicare, if you fail to enroll in Part D upon reaching age 65, there can be penalties. Specifically, if you don’t sign up during your initial enrollment period, or if you go 63 days or more without one of the following (meaning your drug coverage has lapsed):

Medicare Part D
Medicare Advantage (Medicare Part C)
Another Medicare health plan to provide the same coverage as Part D
Creditable prescription drug coverage – such as through your employer or union. To be considered creditable, the coverage must pay at least as much as the standard Medicare Part D plan.

The penalty for late enrollment or lapsed enrollment is 1% per full month that you’ve gone without coverage since your initial enrollment period or the policy has lapsed, times the national base beneficiary premium, which is $35.02 in 2018. The penalty applies for the remainder of your life while you have Medicare Part D coverage.

So if you went for 6 months without Part D coverage, your premium penalty would be calculated as 6 months times 1% times $35.02 – for a penalty amount of $2.10. This late enrollment penalty amount will be added to your monthly Medicare Part D premium.

Part A late enrollment penalty

In some cases, you may not be eligible for free Medicare Part A coverage when you reach age 65 – such as, if you have not earned the requisite 10 years of covered employment. If you find that you’re not eligible for the free Part A Medicare coverage and you want this coverage, you will pay a premium for Part A. However, if you delay signup until some time after your initial enrollment period, you will be subject to a late enrollment penalty.

This penalty is in the form of a premium increase of 10%, and it lasts for twice the number of years that you were eligible but did not sign up. So if you waited two years to sign up for paid Part A of Medicare, you’ll have to pay a premium that is 10% higher for four years. After 4 years your premium will revert to the non-penalty level. Of course, if you meet the 10 credit year limit during the time you’re paying for Part A, you will no longer have to pay a premium for Medicare Part A, even if you signed up late.

The penalty may be waived in the same manner as with the Part B premium late enrollment penalty – if you were covered by creditable employer insurance as an employee, the penalty may be waived. Discuss this with your benefits department – some employer plans do not meet the requirements to delay filing without penalty. In addition, many employer plans require that you file for Part A & B when eligible and thus operate as a supplemental plan to Medicare. However, many plans are allowed to step in the place of Medicare, allowing you to delay enrollment without penalty.

The waiver can also apply for a spouse who is covered by the other spouse’s employer plan, as long as the employer plan is creditable coverage.

Nearly all retiree coverage requires the member to enroll in Part A & B and then the retiree coverage operates as a supplemental to Medicare. At any rate, retiree coverage does not meet the requirement to be creditable coverage, and so if your only other insurance coverage was retiree medical insurance and you delayed filing for Medicare, you will still be assessed the penalty.

Posted on Jul 30th, 2018

by author: jblankenship.

Posted in: Medicare, medicare part b premiums, Medicare Part D.
Tagged: late enrollment penalty · medicare · medicare part b premium

Thoughts on Income and Wealth – An Interview

Jul 27th, 2018

by sraskie.

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A few weeks ago I had the honor of speaking with Dana Larsen of Senior Finance Advisor, a website dedicated to helping individuals plan for their wealth management goals and aligning them with advisors to do so. The interview can be read here

Posted on Jul 27th, 2018

by author: sraskie.

Posted in: financial planning, wealth.
Tagged: wealth management

Social Security Spousal Benefit for a Divorcee

Jul 23rd, 2018

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Recently we talked about the spousal benefit for Social Security retirement benefits. It is also important to note that similar benefits are available to a divorcee.

A divorced spouse is eligible for a Social Security retirement benefit based upon the PIA (Primary Insurance Amount) of his or her ex-spouse under the following conditions:

he or she is at least 62 years of age
the couple was married for ten years or longer
he or she is not currently married
he or she is not eligible for a benefit (on his or her own record or another ex-spouse’s record) that would be greater than the benefit based on this particular ex-spouse’s record

The divorcée’s former spouse does not have to have applied for benefits, as long as the couple have been divorced for at least two years when he or she applies for the spousal benefit. However, the former spouse must be eligible for benefits – that is, he or she (the former spouse) must be at least age 62.

As with the regular spousal benefit, if the divorcee was born before 1954, is at or older than FRA and is eligible for a benefit on his or her own record, the divorcee can choose to receive only the divorced spousal benefit now and delay receiving retirement benefits in order to build delayed credits, increasing the benefit available on his or her own account. If born in 1954 or later, this option is not available.

Any benefits that are received by the divorcee have no impact on benefits to be received by the former spouse, any other current or ex-spouses of the former spouse.

Posted on Jul 23rd, 2018

by author: jblankenship.

Posted in: divorce, restricted application, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: Social Security

Just Getting Started

Jul 20th, 2018

by sraskie.

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At a point in some people’s lives, they conclude they need some sort of assistance with their financial situation. This could be a recent high school or college grad determined to start off on the right track, or those in their mid to late working careers wondering if what they’re doing is the “right” way of doing things financially. In either case, the hope may be to make as few mistakes as possible along the way.

When considering this situation, there are a few things to look at first, before moving on to other planning areas. In other words, think of the follow as a good foundation to have before expanding on or continuing your wealth management plan.

Emergency Fund. This is the money set aside to pay for non-discretionary expenses that will not go away in the event of an emergency (loss of a job, medical, etc.). Although the amount and time frame for the emergency fund may vary, a good rule of thumb is to set aside at least three to six months of non-discretionary expenses. Some individuals may choose to go to nine months or even a year.

This protects individuals so they do not have to leverage expenses on a credit card, home equity, or dig into precious retirement or college investments. As non-discretionary expenses increase, so should the emergency fund. However, non-discretionary expenses don’t have to increase arbitrarily. Be cognizant of whether an increase makes sense (e.g. higher rent, mortgage, car payment, etc.). Which leads to our next point.

Levels of Debt. Look at all the debt that is outstanding. Mortgage, car payments, credit card, student loans, and other debt. If there’s none – congratulations! If there is, consider the impact the debt has on retirement savings, college savings, and other wealth building assets. Debt payments could be replaced with cash flows to these assets to build wealth. Arguably, the only debt “worth” having is a home loan – but even that should be paid off as quick as possible.

Being over-leveraged makes or causes delays or shortages to retirement and college funding. It makes us susceptible to working just to pay current debts, instead of working to fund long-term goals.

Risk Management. Before wealth can be built, it must be preemptively protected, then proactively protected. This is where insurance plays a less-glamorous, but critical role.

Life insurance protect human capital (current and future wages) from pre-mature death, disability insurance does protect income if we can no longer work due to disability. Auto insurance protects us against liability from accidents and homeowners provides liability protection in addition to protecting (for many individuals) their largest asset. An umbrella policy (which everyone should have) provides additionally liability should limits be exceeded on underlying policies.

Health insurance covers illness so we do not become insolvent due to an illness, while long-term care insurance may be necessary to preserve wealth due to long-term care needs. Annuities (the other life insurance) may be necessary to protect against outliving one’s income.

While not exhaustive, these are the general areas to think about then first getting started, or continuing with your wealth management plan.

As always, feel free to reach out to use if we can help you along the way.

Posted on Jul 20th, 2018

by author: sraskie.

Posted in: debt, emergency fund, financial planning, risk management.
Tagged: financial planning

Ah, Sweet Procrastination!

Jul 18th, 2018

4 comments

It’s usually best, for most things in the financial world, to act now rather than waiting around. The notable exception is with regard to applying for Social Security benefits. This is not to say that it’s always (or ever) best to delay benefits – but there can be cases where delaying pays off in spades.

As you’ll see from the table below, if you’re in the group that was born after 1943 (that’s you, Boomers!) you can increase the amount of your Social Security benefit by 8% for every year that you delay receiving benefits after your Full Retirement Age (FRA – see this article for an explanation).

Delay Receipt of Benefits to Increase the Amount

If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive. Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits – which can be an increase of as much as 32½% if you delay until age 70 and you were born in 1941 – when your FRA is 65 years and 8 months, and the increase amount is 7½% per year at that age. See the table below for the increase amounts per year based upon birth year:

Birth Year	FRA	Delay Credit	Minimum (age 62)	Maximum (age 70)
1940	65 & 6 mos	7%	77½%	131½%
1941	65 & 8 mos	7½%	76`⅔`%	132½%
1942	65 & 10 mos	7½%	75`⅚`%	131¼%
1943-1954	66	8%	75%	132%
1955	66 & 2 mos	8%	74`⅙`%	130`⅔`%
1956	66 & 4 mos	8%	73`⅓`%	129`⅓`%
1957	66 & 6 mos	8%	72½%	128%
1958	66 & 8 mos	8%	71`⅔`%	126`⅔`%
1959	66 & 10 mos	8%	70`⅚`%	125`⅓`%
1960 & later	67	8%	70%	124%

So you can see the impact of delaying receipt of retirement benefits – it can amount to more than 50% of the PIA (Primary Insurance Amount), when you consider early benefits versus late benefits. Of course, by taking benefits later, you’re foregoing receipt of some monthly benefit payments; given this, early in the game you’d be ahead in terms of total benefit received. This tends to go away as the break-even point is reached in your early 80’s in most cases.

An Example of Delay

Here’s an example of the benefit of delay in action:

You were born in 1954, and as such your FRA is age 66. According to the benefit statement you’ve received from Social Security, you are eligible for a monthly benefit payment of $2,000 when you reach your FRA (which would be in 2020). If you delayed applying for your benefit until the next year, your monthly benefit payment would be $2,160 per month – an increase of $1,920 per year. If you delayed until age 68 (two years after FRA), the monthly payment would be increased to $2,320, for an annual increase of $3,840. At age 69, delaying would increase your annual benefit by $5,760, and at age 70, your monthly payment would be $2,640, for an annual benefit of $31,680 – $7,680 more than at FRA. This amounts to a 32% increase in your benefit by delaying receipt of the benefit by 4 years!

Notes

It’s important to note that this is not a compounding increase – that is, your potentially-increased benefit from one year is not multiplied by the increase for the following year. The factor for each year (or portion of a year) is simply added to the factor(s) from prior years. You also don’t have to wait a full year to achieve the benefit – this delay is calculated on a monthly basis, so if you delayed by 6 months your increase would be 4% over the FRA amount.

The biggest benefit of this is that you can not only increase the amount you will receive over your lifetime, but also the survivor benefit that your spouse will receive upon your passing. For some folks this can make a huge difference as they plan for the inevitable.

As I mentioned above – this article is only meant to encourage you to consider the impact of delaying on your future benefits. It is not to be construed as a blanket recommendation to delay benefits. Early benefit filing may be the best option in your case – and all of the benefit amounts are designed to pay you approximately the same benefit over your lifetime if you live to the actuarial average, to your early 80’s.

Posted on Jul 18th, 2018

by author: jblankenship.

4 comments already - add to the conversation!

Posted in: delayed benefit, Delayed Retirement Credit, DRC, financial planning, Social Security.
Tagged: financial planning · Social Security

Medicare Enrollment

Jul 16th, 2018

6 comments

When you first reach age 65, assuming you have met the coverage requirements you are eligible for Medicare enrollment. There is a specific period of time that you’re allowed to enroll. After that period you can still enroll, but there can be penalties. That is, unless you have had “creditable” coverage during the period when you were eligible – usually an employer’s plan. This creditable coverage has to meet certain minimums.

Often, employer medical plans require members over age 65 to enroll in Medicare, so that the employer plan will be secondary to Medicare when the member is eligible. This puts the employer plan into the position of acting as a supplemental plan, and Medicare takes precedence in coverage over the employer plan.

Keep in mind that when you enroll in Medicare, you should have started the process some time before the initial enrollment period by crafting a Medicare plan. Specifically, you need to make sure you have made the decisions about Medigap coverage and/or to take part in Medicare Advantage. If going with Medigap, you should have this already settled and ready to go into effect when your Medicare kicks in.

Medicare Enrollment Period

There is a seven month period for your initial enrollment in Medicare. This seven months encompasses 3 months before the month when you reach age 65, the month of your 65th birthday, and the three months following the month you reach age 65. So if your birthday is in June, you have from the beginning of March until the end of September to complete your initial Medicare enrollment.

Medicare Part A can be applied for at any time after your initial enrollment period begins. If fully-insured, this coverage is free, with no premium paid. You might have delayed enrollment due to employment with an employer of more than 20 employees, giving you a waiver from the enrollment requirement. As soon as your employer coverage ends, you should enroll in Part A as soon as possible (as long as you have 10 years of covered employment).

However, if you are in a position where you don’t have fully-insured status, that is, if you don’t have the minimum 40 quarters of covered employment, Part A will cost a premium for you. Enrollment for paid Part A coverage must be completed within the initial enrollment period or one of the annual enrollment periods following your initial enrollment period.

Part B enrollment, which always has a premium cost to the enrollee, must be completed during the initial enrollment period (when eligible) or a penalty premium will be applied to your Part B premium for the rest of your life. If you do not enroll for Part B during the initial enrollment period, you are only allowed to enroll during one of the annual enrollment periods.

The penalty for late Part B enrollment applies for the remainder of time that you are covered by Part B. The penalty is 10% for each full 12 month period that you delay enrollment. For example, if your initial enrollment ended on September 30, 2018 and you wait until the annual enrollment period for 2020 (ending March 31, 2020), you will have a Part B premium penalty of 20%. Even though 30 months passed since the end of your initial enrollment period, only two 12-month periods passed, so the penalty is 20%. The penalty may be waived (see below) depending on why you delayed enrollment.

Must do’s (and don’ts)

Automatic enrollment in Part A occurs for anyone who is collecting or has just filed to collect Social Security retirement or disability benefits when reaching age 65. This includes spouses and survivors receiving Social Security benefits based on a spouse or ex-spouse’s record.

There is no automatic enrollment in Part B – you must actually file an application for Part B and determine how premiums are to be paid. If you are collecting SS benefits (as above), Part B premium is automatically deducted from your monthly benefit payment. If you’re in a position to have to pay for Part A, this premium will also be deducted from your monthly Social Security benefit.

Otherwise, if not collecting Social Security benefits, you must apply for your Medicare coverage during the period of enrollment. Payment must be arranged separately – monthly payment of the Part B (and Part A if you’re required to pay for it) must be done by check or automatic deduction from your bank account.

Keep in mind that when you enroll in Medicare, your eligibility to participate in a High Deductible Health Plan (HDHP) and make Health Savings Account (HSA) contributions is eliminated. Actually, upon your initial Medicare enrollment, you are not allowed to make HSA contributions. This is where you need to pay attention: if your Part A enrollment occurred because you filed for Social Security benefits, you need to be careful about the date that your Social Security benefits begin to be paid.

In some cases Social Security may pay you up to six months’ benefits in arrears if you were eligible for benefits that far back and you haven’t specified that you don’t want the back-benefits. What this does is to re-set your filing date to six months ago, and your Medicare enrollment will be back-dated as well (assuming you were eligible at that time). If you made HSA contributions during that period, you may owe penalties for those contributions that are now disallowed.

You can still use the HSA money to pay qualified medical expenses, you just can’t make new contributions. And if your spouse has not gone through Medicare enrollment, he or she can still make HSA contributions while still eligible.

Penalties and waivers

The Part B penalty for late enrollment was described above – it amounts to 10% added to the premium for Part B for each complete 12-month period that you have delayed your enrollment.

If you’re not eligible for the free Part A Medicare coverage and you delay signup until some time after your initial enrollment period, you will be subject to a premium increase penalty. This penalty is 10% of the premium, and it will apply for twice the number of years that you were eligible but did not sign up.

So if you waited two years (after initial eligibility) to sign up for paid Part A of Medicare, you’ll have to pay a premium that is 10% higher for four years. After 4 years your premium will revert to the non-penalty level.

Waiver of penalty for Part B (and paid Part A) may be available if you have had creditable employer medical insurance coverage and your employer has 20 or more employees. Discuss this with your benefits department – some employer plans do not meet the requirements to delay filing without penalty. Many employer plans require that you file for Part A & B when eligible and thus operate as a supplemental plan to Medicare. However, some plans (specifically for employers with more that 20 employees) are allowed to step into the place of Medicare, allowing you to delay enrollment without penalty.

This waiver can also apply for a spouse who is covered by the other spouse’s employer plan, as long as the employer plan is creditable coverage and meets the minimums as for the employee.

All retiree coverage requires the member to enroll in Part A & B so that the retiree coverage operates as a supplemental to Medicare. This applies even if your retiree coverage otherwise meets all of the requirements as a creditable plan. This is a “gotcha” that catches a lot of unaware enrollees. The “creditable” option only applies for active employees covered by the employer with more than 20 employees.

One exception to this rule that folks with retiree medical coverage must be enrolled in Part A & B is if you are enrolled in the HMO plan through the Federal Employees Health Benefits Program, this plan may be comprehensive enough to waive the required Part B enrollment. If you change your plan and decide to enroll in Part B later, you may still have the penalty for late enrollment applied.

Posted on Jul 16th, 2018

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: Medicare, Medicare Advantage, Medigap.

When It Rains…

Jul 13th, 2018

by sraskie.

2 comments

The other night I was awoken by a pretty severe thunderstorm. Bright lightning and heavy rains lasted throughout the night. By daybreak, it had rained nearly three inches in the span of six hours.

Naturally, I thought, “time for an article.”

The heavy rain made me think about what would happen in the event of a flood. The reason why is that most home insurance policies specifically exclude damage from flooding. That is, if water seeps into a basement from heavy rains and damages the area, homeowner’s insurance would not apply. A specific flood insurance policy is needed.

However, flood is not the only peril home insurance policies will generally exclude. In many cases, most home policies will exclude the following perils.

Flood
Earthquake
Neglect
Termites
War
Intentional loss

Additionally, most home policies (including renters or condo insurance) will exclude or limit coverage on personal property for the following.

Business Property
Cash
Antiques
Jewelry
Coins
Collections
Art
Firearms
Intentional loss
Automobiles (covered under auto insurance)

Lastly, many home policies will exclude or limit the amount of liability coverage on the policy from the following.

Business Use
Pools
Trampolines
Certain Pets (such as dogs deemed “vicious”)
Intentional acts
Illegal Acts/Activities

Many companies do allow policyowners to endorse their current policies. This means providing coverage separate from the home policy, for a specific item such as a wedding ring, firearm, painting, coin collection, etc.

If you’re in doubt, feel free to let us know or speak to your insurance agent.

Posted on Jul 13th, 2018

by author: sraskie.

Posted in: flood insurance, home insurance, home insurance exclusions, renters insurance.
Tagged: financial planning · insurance · risk management

A Roth IRA for a student is a great idea!

Jul 9th, 2018

4 comments

Summertime brings a break from school, and for many students that also means working. During the summer months, a student can make some pretty good money – maybe enough to help pay for the next semester of school, or saving up toward a replacement for the old car they’ve had for a while. It should also be part of the plan to save some of the earnings for longer-term concepts – a house in the future, and yes, even retirement. This is where a Roth IRA for a student comes into play, and it can really make a lot of sense when you look at it.

Saving regularly, beginning with the first money a student earns can swiftly become a habit. This habit will serve the student well, long into the future. But there are current benefits to the saving habit as well.

Benefits of a Roth IRA for a student

When a student saves money by contributing to a Roth IRA, an interesting thing occurs: since the majority of the earnings (if not all) are less than the taxable minimum, by putting the money in a Roth IRA, this money will never be taxed. This is to assume that the money is left in the Roth IRA until retirement or some other qualified distribution.

Because the Standard Deduction in 2018 for a dependent of another taxpayer is “the total earned income plus $350, up to $12,000”. So the student could earn up to $12,000 over the course of the year (from a summer job and perhaps part time jobs during the school year, for example) with zero taxes! And from this $12,000, the student could contribute up to $5,500 to a Roth IRA in 2018.

Of course, it may not be reasonable for the student to put aside so much of his or her earnings. After necessary expenses, some gas money, and a bit of “mad” money, maybe there’s only $500 or $1,000 left for savings. Any little bit can be a good start! It might be a good idea to set a specific percentage aside for long-term savings, like 10% of each paycheck, to get in the habit of paying yourself first. This is, as you might recognize, an excellent way to augment saving activities by making it a personal requirement of every dollar earned.

In addition to the “never to be taxed” factor, consider this: by comparison to a standard savings account, a Roth IRA for a student does not need to be considered as a source for FAFSA (financial aid) calculations. This is because the Roth IRA is a retirement account, and as such is not included in FAFSA reporting. For some students, this can make a difference in financial aid.

Being a retirement account, there are legal hindrances to early withdrawal – which might keep the temptation to withdraw at a minimum. This way, the savings habit can continue and returns can compound over a long period of time. That $500 or $1,000 saved this year can grow to an impressive sum over time. If $1,000 is set aside for a 20-year-old today and left alone at a modest average return of 5% per year, after 40 years it can build to more than $7,000. Continued saving will, of course, have a much more dramatic effect: if another $1,000 is set aside every year for those 40 years, it could grow to $137,000!

Posted on Jul 9th, 2018

by author: jblankenship.

4 comments already - add to the conversation!

Posted in: college savings, Roth IRA.
Tagged: college savings · roth ira

Do you need a Medicare plan?

Jul 5th, 2018

6 comments

mona needs a medicare plan Do you need a Medicare plan? It’s standardized social insurance, isn’t it?

Oh, Mona, you have a lot to learn! (Unless you’re quite far away from retirement age, of course. Although, you might gain some good insight here if you’re purchasing insurance on the ACA exchanges as well!)

For many folks, healthcare insurance has been a limited-choice environment, where our employers have given us at most a couple of options to choose from, and very little in the way of variability in the plan options. But when it comes to Medicare, (and not surprisingly, ACA-exchange insurance), the playing field is vast and variable. It makes a lot of sense to do your research as you enroll for Medicare. And this applies whether you’re signing up for the first time or you’re a veteran of many Medicare battles over the years.

Outline of a Medicare plan

On Medicare’s official website, which has been criticized for being confusing and difficult to navigate, there is a page detailing your choices regarding Medicare coverage. Incidentally, Medicare also takes it on the chin for offering little guidance in choosing your best option, but the referenced article is actually a pretty good place to start.

I won’t copy the article verbatim here, but I’ll walk through the major points briefly to underscore the importance of a Medicare plan for yourself and your family.

The first item in the list is costs. And costs for healthcare are potentially enormous. If you make a mistake about your Medicare filing and don’t pay attention to the costs, it could be financially disastrous for you and your family.

One of the niggling details about Medicare is that, if you’ve chosen the traditional path of Medicare Part A coupled with Medicare Part B, you are setting yourself up for a potential calamity. This is because Part B has no out-of-pocket maximum – no cap on how much you can be required to pay in copayments and coinsurance during a year or over you lifetime. Imagine the seemingly unlimited cost for some of these new, cutting-edge targeted medical treatments. You could be required to pay a percentage of millions of dollars of treatment.

It is for this reason that many folks (but not a majority, by any stretch) choose a Medigap (or supplement) policy to augment Parts A & B. Medigap policies are designed to fill the “gaps” in coverage, keeping you from the pain of having to pay unlimited coinsurance.

Medicare Advantage plans (aka Part C) can also resolve this issue, as these plans each have annual out-of-pocket maximums.

Of course, Medicare Advantage plans and Medigap insurance all add to the premium costs, so again, you should research and plan what your costs might be with various coverage options.

Speaking of coverage, that’s the second item in Medicare’s list. Of course, you want to tailor your Medicare plan to meet your healthcare needs, so understanding what your plan covers is important. And this is true not only the first time you sign up, but annually when you have the option to change coverage.

It would be nice if you could just choose your plan once and only make changes when your circumstances change. The problem is that many facets of the choices you made last year can be changed, often significantly, when the new enrollment period comes around. Part D (prescription drug) plans are notorious for adjusting the “formulary” quite often. (Formulary is the glossary term for the list of drugs covered by the plan.) Plus, your own health may change, requiring a new prescription that wasn’t covered under your old plan’s formulary.

The next item in the list is your other coverage. Primarily this deals with Medigap coverage and any coverage that you have from other sources, such as an employer’s coverage. The point is that it’s important to know how this extra coverage coordinates with your Medicare plan, so that you don’t have any surprises.

Prescription drug coverage is next in the list. As mentioned before, Part D plans (and not shockingly, any other drug plan) often change their formulary on a regular basis, so you need to make sure your meds are covered.

Much the same as with drug plan formularies, Medicare Advantage plans often make changes to their network of doctors and hospitals (which is the next item in the list). Similar to the HMOs many of us have grown accustomed to, you need to make sure that your Medicare Advantage plan provides you with access to your chosen doctors and hospitals, or viable alternatives. This is a factor to check out annually during the enrollment period.

Focusing on the consumer experience aspect, Medicare’s list includes a consideration for quality of care. If you’re not currently satisified with the care you’re getting from your chosen plan, you should do your research and choose a Medicare plan to improve this aspect going forward.

Lastly, if you travel much (primarily internationally, but state-to-state can cause problems depending on the availability of in-network providers if you’re on a Medicare Advantage plan), you need to review the limitations on coverage for you with the plan you’re using. Most plans don’t provide much coverage internationally, although some Medigap Plans (specifically Plan C, D, F and G) will cover a portion of your medical expenses internationally. Original Medicare (Parts A & B) does not provide international coverage, although you may be able to supplement with additional private coverage to meet this need.

So, as you can see, there are quite a few items to consider in your Medicare plan. It’s not as simple and straightforward as you thought. And as mentioned above, the rules can change regularly, not to mention your own circumstances changing as you age. It doesn’t have to become a full-time job, but it does pay off in the long run to develop and maintain a Medicare plan.

Posted on Jul 5th, 2018

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: Medicare, Medicare Advantage, Medigap.
Tagged: medicare · Medicare Advantage · Medigap

2018 Trust Fund Report Takeaways

Jul 2nd, 2018

2 comments

Recently the Social Security Trustees released the 2018 Trust Fund Report. As has been the case over the past several years, the outlook for the Trust Fund is not good. As of 2018, the projection is that by the year 2034, the Trust Fund will be exhausted, and future benefit payments will have to be made solely from current tax receipts. If this is the case and no changes are made to the Social Security system, future benefits will have to be reduced by 23% going forward.

Please note that this article is only addressing the OASI (Old-Age and Survivors Insurance) Trust Fund, not the DI (Disability Insurance) Trust Fund. DI Fund is actually in better shape than the OASI Fund.

As usual, this report was met with a common response – one tweet effectively said “Name one annuity company that has published that they will cut payments by 25% on their annuities in 16 years?” Much drama to be found…

Of course, that rhetorical question was misguided and had the facts wrong, but it’s indicative of the kind of angst such reports cause. So let’s look at the facts. There are two types of fact that apply here – mathematical and policy. Let’s look at the math first.

The tweet mentioned above was made in defense of a strategy to take benefits as early as possible. The historical result for early filers is often less than optimal. The system is designed to deliver more-or-less equal benefits over your lifetime regardless of when you file, if you live to the average age. But, just between you and me, we know you’re above average – oddly enough, so am I. Because of that, you and I can expect to live longer than the projected approximation of ages 82-84. And when we live longer than that, we will be mathematically “in the black” if we delay Social Security benefits as long as possible.

I know that no argument in the world is likely to change the mind of someone who is dead set on filing for Social Security benefits early. By all means, go ahead if it makes you feel better. In the end, the more that choose to file early, the better off the Trust Fund will be, because you’re leaving money in the system by short-changing yourself and your family. More for the rest of us! :-)

Keep in mind, this is not to say that there are not compelling circumstances in which early filing may be necessary. If you have no other (or not enough other) resources, or if you have ill health or an expectation that your lifetime would be shorter than the actuarial estimate, early filing may be your best option.

Facts from the Social Security 2018 Trust Fund Report

I mentioned previously that if no changes are made, the projection is that in 2034 benefits may have to be reduced by up to 23%. First of all, this is an improvement from recent years’ projections: as recently as 2013, the projected Trust Fund depletion was a year earlier (2033), and the required projected reduction thereafter was steeper at 25%. (This is likely where the Tweeter mentioned above got his information from.) So, although it’s not great news, the projections have actually improved in these intervening five years.

At the same time, the projected shortfall is based on nothing changing about the Social Security program. That’s extremely unlikely. But don’t expect any changes in the short term. Congress has a long, proud history of waiting until the last moment to avert crises.

To illustrate, here’s an excerpt from the 1980 Trust Fund Report (VIII. Conclusion):

Over the short term the OASI trust fund will face financial strains requiring policy actions. Without such actions, the OASI fund would be depleted in late 1981 or early 1982, depending on the course of the economy.

At that time, we were facing a depletion of the Trust Fund within one to two years! And guess what? Congress (promptly?) acted a little more than 2 years later (early 1983) by passing landmark legislation altering the Social Security program. This legislation augmented the input sources and outflows to produce a projection that in the 1984 Trust Fund Report (VII. Conclusion) indicated virtually no shortfall of trust fund amounts for the forseeable 75 year period. Of course, at that time no one could predict the kind of economy we’ve been seeing in the first two decades of the new millenium, which have (at least partly) been the blame for the accelerated projected exhaustion of the trust fund.

Something will be done, and of course it won’t be painless – but there will be action and the future of the Social Security program will be viable once again, at least for a while. There have been many efforts put forth as potential policy changes that could resolve this impending crisis – increase the wage base, means test the benefit payouts, and the like. Whatever it is, expect the changes to be unpopular, but effective to the extent that the program will continue paying benefits as promised.

Posted on Jul 2nd, 2018

by author: jblankenship.

Posted in: #noTOP, Social Security, social security administration, social security benefits.
Tagged: Social Security · trust fund

Designated Roth Account (Roth 401k) Distributions

Jun 25th, 2018

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Photo credit: diedoe

In a previous post we discussed the general information surrounding Designated Roth Accounts (also known as a Roth 401k) – eligibility, tax treatment, and contributions. In this post we’ll go over the nuances involved in distributions from a Designated Roth Account under a 401k. Distributions are a little different from most other retirement plans, as you’ll see…

Required Minimum Distributions

One of the first things that is different about Roth 401k distributions is that the Required Minimum Distribution (RMD) rules DO apply to these accounts. This is different from the Roth IRA, as RMDs are not required by the original owner under present law. RMD for a Roth 401k are the same as the RMD rules for all other accounts to which the RMD rules apply.

There is, however, a way to get around the RMD rule: if you roll over your Designated Roth 401k account balance to a Roth IRA, RMDs no longer apply. Obviously this is a tax-free event, since both accounts are non-taxable in both contributions and earnings. As long as this is done before the first year of RMD, these rolled over funds will never (under current law) be subject to RMD rules to the original owner of the account. When inherited, Roth IRA and Roth 401k funds are subject to RMDs as inherited accounts – but that’s a topic for another day.

Qualified Distributions

Another difference for the Designated Roth 401k account is in the definition of qualified distributions. As with other retirement accounts, qualified distributions can occur when one of the following events occurs:

account owner reaches age 59½; or
account owner dies; or
account owner becomes disabled (per IRS definition).

In addition to one of those events, in order for the distribution to be qualified (and therefore tax-free), the account must have been in existence for at least 5 years.

Non-Qualified Distributions

A non-qualified distribution is, as you might guess, when the rules for a qualified distribution (above) have not been met. Of course, there are complicated rules associated with any non-qualified distribution from a Designated Roth account.

Pro Rata Rule for Non-Qualified Distributions

A pro rata rule applies (instead of the ordering rules that apply to Roth IRA accounts) for non-qualified distributions from a Roth 401k. For example, if the account had received contributions of $5,000 and had grown to $10,000, when a distribution occurs before the account has been in existence for 5 or more years, 50¢ of every dollar will be taxable. This is different from the rule associated with a rollover, as you’ll see.

Ordering Rule

Just to confuse matters, when rolling over a portion of a Designated Roth 401k account to a Roth IRA in a non-qualified distribution, the ordering rules do apply, so that the first portion rolled over is the taxable amount (the earnings). If the rollover was a qualified distribution, all amounts are considered basis in the new account, and therefore non-taxed upon a qualified distribution.

Rollovers

Now, let’s see how the IRS has really muddied the waters: when rolling funds over from an existing employer to another employer’s Roth 401k – it’s a straightforward activity if you do a trustee-to-trustee transfer – same as for a transfer to a Roth IRA. However (and there’s always a however in life, right?) if you do a non-qualified 60-day rollover things really get complicated.

Complications With a 60-Day Rollover

Here’s what happens with the 60-day rollover to a new employer’s Roth 401k plan: first of all, only the growth (or earnings) from your old employer’s plan can be rolled over to your new employer’s Roth 401k plan. In addition, the earnings portion of the account will be subject to mandatory 20% withholding, even if you roll the entire amount into the new employer’s plan, which should be a tax-free event.

Here’s an example: your Roth 401k account has $20,000 in it, of which $5,000 is earnings. You decide to roll over this account to your new employer’s Roth 401k plan. If you don’t do a trustee-to-trustee transfer, you will only be allowed to put $5,000 (the earnings) into the new account. When you take the distribution, you’d receive a check for $19,000, which is your $15,000 basis plus the $5,000 earnings minus 20% ($1,000) mandatory withholding tax. You are allowed to put up to $5,000 into the new plan, plus up to $15,000 into your Roth IRA, all tax free, even though you were forced to have $1,000 withheld.

Of course, that amount that was withheld will be available to you as a credit against your tax obligation at the end of the year, or as a refund if it caused an overpayment.

If you did a trustee-to-trustee transfer, none of this withholding or earnings-only limitation would have applied, so it makes good sense to do the trustee-to-trustee transfer whenever possible, to avoid such a situation.

5-Year Rule

Rollover To Another Roth 401k or Roth 403b

The last nuance about Designated Roth 401k accounts covered here is the 5-year provision and how rollovers affect it. If you do a trustee-to-trustee (either qualified or non-qualified) rollover of funds to a new employer’s Roth 401k account, the “5-year” starting date will follow from your original account – or rather, whichever account was established earlier will apply to those funds going forward.

On the other hand, if you do a 60-day (again, either qualified or non-qualified) rollover to a new Roth 401k, the age of the new account will apply, even if the funds had been in the old Roth 401k for a significant period of time. Only the taxable or earnings component will be allowed to rollover in a 60-day rollover, so the age of the account is a moot point.

Rollover to a Roth IRA

For the same situations as in the paragraphs above, but the transfers are to a Roth IRA, no matter what kind of rollover is done, direct (trustee-to-trustee) or 60-day, qualified or non-qualified, the results are the same – the 5-year holding period will be that of the receiving Roth IRA account, no matter how long the funds had been held in the Roth 401k account. However, each individual conversion or rollover to a Roth IRA has its own 5-year period, separate from the first 5-year period. See the article Two 5-year Rules for Roth IRAs for more details on this nuance. This is a good reason to establish a Roth IRA immediately, to have a vehicle to receive such transfers if the situation arises.

The one wrinkle with rollovers into Roth IRA accounts has to do with taxability of the rolled over funds: If the distribution is qualified, then all of the funds rolled over are considered basis, and when distributed for any reason the basis is tax-free (no matter the holding period). If the distribution is non-qualified, the funds retain their original characterization from before the rollover – part is contributions (basis) and part is earnings (taxable until qualified).

So you can see some of the great benefits of doing a trustee-to-trustee transfer over the 60-day transfer – especially if the rollover is to be non-qualified. As always, consult your financial advisor before doing any of these, just to make sure you don’t make a mistake!

Posted on Jun 25th, 2018

by author: jblankenship.

Posted in: drac, Early Distribution, financial planning, IRA, Roth 401k, tax.
Tagged: financial planning · IRA · Roth 401k · tax

Income Replacement with Disability Insurance

Jun 22nd, 2018

by sraskie.

1 comment

Most individuals understand the need for traditional life insurance. It pays a death benefit in the event a loved one, such as a spouse, dies prematurely. The death benefit is there to provide income for expenses, and to fund future expenses such as college or the surviving spouse’s retirement.

While not overlooked, a seldom though about income replacement tool is disability. Disability insurance should not be ignored, and arguably should be considered as a higher priority than life insurance. This is because statistically, an individual has a higher chance of becoming disabled, than dying prematurely. Especially if they’re young.

Most disability policies are offered through an employer as benefit for employees. Typical policies provide 60-70% of income replacement in the event the covered employee becomes disabled.

When initially getting disability insurance, it’s important to pay close attention to the definition of disability in the policy. This definition will determine whether the policy will pay or not, for being disabled.

For example, a policy with a definition of “own occupation” will provide disability benefits in the event the insured becomes disabled and cannot perform the duties of their own occupation. This definition is critical for occupations such as surgeons, doctors, and other professions that are specialized.

Another definition is “any occupation”. A policy with this definition will only pay when it’s deemed the insured cannot perform the duties of any occupation. This is a very strict definition and it’s much more difficult for the insured to have the policy pay. Social Security’s definition of disability is any occupation.

The premiums between the two definitions are different as well. With own occupation, the premium will be more expensive than any occupation. This is because the own occupation policy is more likely to pay in the event of a disability. But again, the extra premium is worth it for specialized occupations with high incomes to protect.

When deciding on a policy, be sure to check the elimination period. The elimination period is analogous to a “time deductible”. In other words, how long the insured must wait after becoming disabled to receive benefits. Elimination periods range from 30 to 180 days. The longer the elimination period, the cheaper the premium and vice versa.

Choice of elimination period may coincide with how much is in the emergency fund (generally 3 to 6 months of expenses).

Finally, taxation of benefits will depend on how premiums are paid. If an individual pays premiums with after-tax dollars, then any benefits received are tax-free. If an employer pays the premiums, the employer can tax a tax deduction and any benefits received are taxable to the employee. If benefits are paid by the employee on a pre-tax basis (as part of a benefit plan), then any benefits received are taxable.

Posted on Jun 22nd, 2018

by author: sraskie.

Posted in: disability benefits, disability insurance.
Tagged: disability insurance

Calculating the Social Security Retirement Benefit

Jun 20th, 2018

1 comment

There are three factors that go into calculating your Social Security retirement benefit – your PIA (Primary Insurance Amount), your FRA (Full Retirement Age), and the age you are when you start receiving benefits. Having these numbers, we need to determine if you are applying for early benefits, and therefore a reduced amount, or if you’re delaying receipt of benefits to increase the payment amount. If you file at exactly your FRA, your benefit will be the same as your PIA.

Applying Early for Reduced Benefit Amount

When you apply early (before your FRA), calculating the Social Security retirement benefit will determine how much your benefit will be reduced from the PIA. First, determine how many months there are between your FRA and the age at which you’ll start receiving benefits. The benefit will be reduced by a percentage based upon the number of months you come up with. The first 36 months are multiplied by 5/9 of 1%, and any months beyond 36 are multiplied by 5/12 of 1%.

So, if your FRA is age 66, and you intend to begin receiving benefits in the month that you are age 62 and 6 months, your PIA would be reduced by 20% for the first 36 months (36 * 5/9% = 20%) plus an additional 2½% for the remaining 6 months (6 * 5/12% = 2½%) for a total of 22½%. The maximum amount that the PIA can be reduced is 25% for folks with FRA of age 66, ranging up to 30% for those with FRA of age 67.

When you come up with this reduction factor, it is then applied to your PIA, and the result is your anticipated benefit amount. You can see in the table below how waiting a few months or years can make a big difference in the benefit amount. And this change can have a huge impact on your lifetime benefits – because once you start receiving your benefit, it won’t change other than with the annual COLA increases – unless you continue to work while receiving benefits, which could increase your PIA.

Delaying Receipt of Benefits to Increase the Amount

If you are delaying your retirement beyond FRA, you’ll increase the amount of benefit that you are eligible to receive. Depending upon your year of birth, this amount will be between 7% and 8% per year that you delay receiving benefits. The increase can be as much as 32% if you delay until age 70 and you were born between 1946 and 1954 – when your FRA is 66 and the increase amount is 8% per year at that age. See the table below for the increase amounts per year based upon birth year:

Birth Year	FRA	Delay Credit	Minimum (age 62)	Maximum (age 70)
1940	65 & 6 mos	7%	77½%	131½%
1941	65 & 8 mos	7½%	76`⅔`%	132½%
1942	65 & 10 mos	7½%	75`⅚`%	131¼%
1943-1954	66	8%	75%	132%
1955	66 & 2 mos	8%	74`⅙`%	130`⅔`%
1956	66 & 4 mos	8%	73`⅓`%	129`⅓`%
1957	66 & 6 mos	8%	72½%	128%
1958	66 & 8 mos	8%	71`⅔`%	126`⅔`%
1959	66 & 10 mos	8%	70`⅚`%	125`⅓`%
1960 & later	67	8%	70%	124%

Above you can see the impact of delaying receipt of retirement benefits. It can amount to more than 50% of the PIA, when you consider early benefits versus late benefits. Of course, by taking benefits later, you’re foregoing receipt of monthly benefit payments during the delay; given this, early in the game you’d be ahead in terms of total benefit received. This tends to go away as the break-even point is reached in your early-80’s in most cases.

Posted on Jun 20th, 2018

by author: jblankenship.

Posted in: Delayed Retirement Credit, DRC, Early Filing, PIA, primary insurance amount, Social Security.
Tagged: delayed retirement credit · early filing · Social Security

The Spousal Benefit Option for Social Security Benefits

Jun 13th, 2018

7 comments

There is a provision in the Social Security system that many couples take advantage of – the spousal benefit. This benefit is applicable when one spouse has had little or no working history, such as a stay at home mom or dad, and where the other spouse has had a working career covered by Social Security, that has provided enough quarters of earnings to make him or her eligible for Social Security retirement benefits.

Note – to simplify the explanations, from this point forward we’ll refer to the lower-earning member of the couple as “spouse” and the higher-earning spouse as “worker”.

This benefit option allows the spouse to receive a potentially greater benefit than the one based on his or her own earnings record – equal to ½ of the full benefit of the worker at his or her Full Retirement Age. Specifically, if the spouse has earnings that represent a PIA (Primary Insurance Amount) that is less than ½ of the worker’s PIA, a spousal benefit amount is added to the spouse’s own benefit to increase the amount of the benefit to ½ of the worker’s PIA.

So, if the spouse has a PIA of $1,100 and the worker has a PIA of $2,450, an amount would be added to the spouse’s benefit to increase the PIA to $1,225, ½ of the worker’s PIA. The ½ benefit is provided if the spouse has filed for benefits at FRA (Full Retirement Age). If filing for the spousal benefit at age 62, the spousal benefit will be equal to 35% of the worker’s PIA. At any age after 62 but before FRA, the amount will be pro-rated. After FRA, there is no increase to the spousal benefit.

Qualifications for spousal benefit

There are several qualifications and factoids that you need to understand about the spousal benefit:

the spouse and the worker must have been married for at least 12 months (continuously) immediately prior to applying for benefits.
the spouse must be age 62 or older.
the worker must be eligible for benefits, meaning that the worker must file for benefits with Social Security and is actually receiving them. Suspended benefits by the worker also suspends the spousal benefit.
the spousal benefit does not include any credits that the worker may be eligible for upon delaying receipt of benefits, as the spousal benefit is based upon the worker’s PIA, not the actual benefit the worker may receive.
there is no increase in spousal benefit by delaying application after FRA of the spouse.
if the spouse has reached FRA and would like to delay receiving his or her own retirement benefit, the full spousal benefit will be available to the spouse until he or she files for his or her own benefit.
if the spouse continues to work while receiving benefits, the same earnings limits apply to the spousal benefits as would apply to primary worker benefits. However, after FRA, earnings limits do not apply to spousal benefits, same as regular retirement benefits.

Posted on Jun 13th, 2018

by author: jblankenship.

7 comments already - add to the conversation!

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

Things to Consider as You Set Up a SOSEPP

Jun 11th, 2018

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sosepp water bottle caps So, you’ve decided that you’d like to begin taking distributions from your IRA funds – and you’re under age 59½, so you need to structure your distributions as a Series of Substantially Equal Periodic Payments (SOSEPP). (For more background information on the SOSEPP, see this article.) It is important to do this right, because once you set up the plan, you’re pretty much stuck with it.

Steps to Set Up a SOSEPP

The first step in setting up a SOSEPP is to figure out just how much you’ll need to take each year. Working with a financial advisor or an actuary, you can figure out how much money is required to support the SOSEPP payments that you require.

Once an amount is determined, a new IRA can be opened and the money required rolled over into that account. Other IRAs and 401(k) accounts will then hold the remainder of your funds – which provides your savings for future needs, once the SOSEPP is no longer in effect, or a “safety valve” for you to use in the event that you need additional funds at some point. Of course, taking an additional amount from one of these other accounts would require payment of the 10% penalty (unless one of the other exceptions applies) – but this is much better than taking too much from your SOSEPP IRA and busting the plan, which carries some heavy penalties.

Keep in mind, especially if you’re setting up your SOSEPP early in your life, it is possible to set up another SOSEPP from a different account should the need arise. You would just have two series’ going on at the same time, with different variables impacting each series.

In other cases, you may just want to take the greatest possible payment that you can from account, which can be easily determined when the span of the plan is understood, given your age and the amount in the IRAs.

Several choices are necessary to set up the plan:

Choose one of the three permitted methods – RMD, amortization, or annuitization
Choose a life expectancy table – single, joint, or uniform life expectancy
Choose an interest rate (if using amortization or annuitization)
Decide whether to use annual recalculation (if using amortization or annuitization)
Choose the account balance valuation date
Determine the “period” for your payments. These can be monthly, quarterly or annually, but must at least be annual, and must be at the same regular interval each “period” once set up.

All of these details must be attended to when setting up the plan, and careful attention should be paid when making these decisions. If you set up such a plan early in your life (say at age 50 or earlier) you will have to live with your choices for a considerable amount of time. Understand what each choice means and can mean in the future as you make these decisions.

Posted on Jun 11th, 2018

by author: jblankenship.

Posted in: 72t, Early Distribution, financial planning, IRA, retirement plan, sosepp, tax.
Tagged: financial planning · IRA · retirement plan · SOSEPP · tax

The Heartbreak of Withholding From Indirect Rollover

Jun 6th, 2018

1 comment

heart break of rollover by NDrewC Taking early withdrawals from your retirement plans is rarely a good idea, and should only be considered when it’s the last possible option available to you. But this article is more about the pain you could experience if you don’t handle a rollover correctly – bypassing the trustee-to-trustee transfer option and going with an indirect rollover.

Withholding Rule For Indirect Rollovers

In general, if you take an early withdrawal (pre-age 59½) from a Qualified Retirement Plan (QRP) that includes pre-tax money, the custodian of the account is required to withhold and pay to the IRS 20% of the pre-tax amount withdrawn. This can still be a tax-free transaction if you finish the indirect rollover process correctly and place the entire amount of the distribution in an IRA or other QRP (like a 401k) within 60 days. However, if you don’t complete the indirect rollover, with the whole amount of the distribution, you’re likely to get a tax surprise…

A transaction like this is called an “indirect rollover”, as opposed to a direct or a trustee-to-trustee rollover. In the event that you complete the indirect rollover within 60 days, you will need to come up with the 20% that was withheld in order to have a full rollover – otherwise you’ll have to pay tax and a penalty on the amount that was not rolled over. (It is important to note that this mandatory withholding is only for employer plans – 401k, 403b and the like. There is no mandatory withholding on an IRA distribution.)

An Example

For example, let’s say you’re 50 years of age, and you have a 401(k) from a former employer that you’d like to roll over into your IRA account. The 401(k) is worth $50,000. For whatever reason, you opted to have the 401(k) custodian send you a check for the amount, which you then plan on sending to the IRA custodian for deposit (within the allowable 60 day period, as an indirect rollover).

Lo and behold, when the check arrives, it’s only made out for $40,000! This is because the custodian was required to withhold 20%… and now, since you don’t have any savings to speak of, you can only send the $40,000 over to the IRA custodian. Guess what? Come tax time, you will have to include that “missing” $10,000 as income, plus you’ll get to pay a 10% early withdrawal penalty as well. So if you’re in the 25% tax bracket, you get to pay $3,500 in tax and penalties (25% times $10,000 plus 10% times $10,000).

Now, the original 401(k) that was worth $50,000 is reduced to an IRA worth $40,000 and a tax refund of $6,500 (since $10,000 was withheld and your tax and penalties were only $3,500). This swift little maneuver has cost you 7% of your retirement plan! Plus, you’ve lost tax-deferral on $10,000…

ALWAYS Do the Direct Rollover

It is for this reason that, whenever possible, you always should do a direct, or trustee-to-trustee transfer when rolling over IRA and QRP funds to a new account. When you do a trustee-to-trustee rollover, no withholding applies, so you don’t have to make up any difference, and your tax-deferred amount remains intact.

It’s important to note that in our example above, if you had the $10,000 available to you in savings or elsewhere to make up the difference for the withholding, you could still complete the indirect rollover without tax or penalty by sending a total of $50,000 to the IRA custodian within 60 days. Then when you file your taxes for the year, that $10,000 withheld would amount to either a refund to you or a reduction in the amount of tax that you had to pay for the year.

Posted on Jun 6th, 2018

by author: jblankenship.