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

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Tagged: 529 plan · coverdell · education expenses

Back-door Roth Blessed by Congress

Jan 16th, 2018

8 comments

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

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

Tax Cuts and Jobs Act

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

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

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

Posted on Jan 16th, 2018

by author: jblankenship.

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Posted in: IRA, Roth conversion, roth ira contribution.
Tagged: IRA · roth conversion · roth ira

Life Moves Pretty Fast…

Jan 12th, 2018

by sraskie.

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Photo credit: jb

In the classic 80’s movie, Ferris Bueller’s Day Off, Ferris Bueller says, “Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.”

In other words, life happens. That’s why it’s important to meet with your financial planner to see if anything has changed, and if there’s anything that needs to be done to assist with those changes.

The reason it’s important to meet with your planner is that he or she can ask questions and propose situations that you might not even be aware of or think about. A recent example would be how the new tax law affects your situation. Another example would be a child that is going to college, a job change, death, divorce, or 2018 being the year you plan to retire.

A financial planner will be able to provide another set of eyes to your situation to perhaps think of things you may not have, or to potentially look at your situation objectively, without any personal bias you may have. An example being hanging onto an investment you fell in love with and don’t want to sell, but the prudent thing to do is to sell. Or, it may mean preventing you from a bad financial decision (bitcoin, or unnecessary debt).

However, life does move pretty fast. We get caught up with our careers, family, friends, among other things. Sometimes we tend to be reactive, rather than proactive. That is, we usually think about things only when they need to be taken care of, or after something has happened.

That’s why it’s good to periodically meet with your financial planner. And if you don’t have one, consider meeting with a few and finding one that works well with you and your situation. Even if you think you don’t need any help or your situation hasn’t changed, a financial planner may be able to see something you don’t. And if you’re concerned about a planner creating an artificial need or overselling you, find a fiduciary. They’re legally required to educate you and tell you whether or not you have an issue that needs to be addressed.

Posted on Jan 12th, 2018

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning.
Tagged: fiduciary · financial planning

Roth Recharacterization is No Longer Allowed

Jan 8th, 2018

3 comments

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

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

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

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

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

jb note: Astute super-reader clydewolf mentions:

Kaye Thomas at Fairmark.com says he has confirmed with the IRS
that 2017 Conversions can be recharacterized.
http://fairmark.com/forum/read.php?2,84769

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

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

Posted on Jan 8th, 2018

by author: jblankenship.

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Posted in: IRA, recharacterization, Roth Conversion.
Tagged: IRA · recharacterization · roth conversion

Income ≠ Wealth

Dec 29th, 2017

by sraskie.

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There’s a big difference between income and wealth. Income can be considered the amount of money an individual earns on a consistent basis. For most individuals, this is a paycheck. Wealth can be considered an individual’s net worth, or, more specifically, how much income their wealth generates and how long they can sustain a given lifestyle without having to receive a conventional paycheck.

Some individuals may confuse the two. Some may feel that a high income equates to wealth. They may also think that to be wealthy or to generate wealth, their income must be high. This isn’t the case. While a high income may help to build wealth faster, it is no guarantee that an individual is or will be wealthy.

Let’s look at an example of two couples, about the same age, nearing retirement and wondering if they have enough wealth to do so. These are based on actual client interactions, although some info will be generalized to maintain anonymity.

The first couple, Hank and Bess, has saved roughly $3 million in retirement accounts. They are both in their mid-50sand neither earned more than $50,000 annually throughout their careers. This couple is debt-free, while owning two vehicles, two homes, a business (purchased with cash just before retirement) and needs about $38,000 annually to meet their retirement expenses – half of which will be covered by their Social Security when they take it.

Conservatively, this couple needs to earn just over half of a percent (.00633) annually to cover the $19,000 needed for their expenses, from their $3 million portfolio, while leaving the principal untouched. This couple is very wealthy.

The second couple, Stan and Kat, currently still work and earn about $750,000 annually. They have a big house with a mortgage, no kids, and make payments on two luxury sedans. They make quite a bit of money annually and their lifestyle shows it. However, when considering retirement, this couple’s wealth – what they have currently saved to support their wanted retirement lifestyle, would last them between 10 to 13 years.

On the outside, it may look like Stan and Kat are very wealthy. However, compared to Hank and Bess, their wealth is quite low. Unless they change their lifestyle, or saving habits, Stan and Kat’s retirement outlook remains grim.

Income doesn’t not equate to wealth. As you can see from the examples above, it doesn’t take a huge income to build wealth. It takes discipline to save, avoiding unnecessary debt, and delaying gratification to have a comfortable retirement in the future.

Posted on Dec 29th, 2017

by author: sraskie.

Posted in: net worth, wealth.
Tagged: financial planning

How to Build Wealth

Dec 22nd, 2017

by sraskie.

6 comments

How you choose to spend or invest your money can have an impact on your net worth. Many of you are familiar with the net worth equation which is Assets – Liabilities = Net Worth. In other words, what you own, minus what you owe, equals what’s yours.

However, what is conventional wisdom isn’t always what’s best. What I mean is, just because something is generally known as an “asset” doesn’t mean it’s going to help your wealth. Here are a few examples.

Your house. While generally considered an asset, and to some, an investment, your home can also drain you of net worth and cash flow. Homes need upkeep, repairs, insurance, utilities, taxes, and many have mortgage payments. Additionally, your home does not produce any free cash flow. There’s also no guarantee your home will appreciate (it may even depreciate). However, paying down your mortgage will generally help your net worth.
Your car. Let me be blunt. Your car is a wasting asset. It depreciates over time and in many cases, ends up costing you more that you paid for it. Vehicle loans aside, cars need insurance, gas, maintenance, and upkeep. A loan on a vehicle is making payments on a depreciating asset. Like your home, your vehicle produces zero cash flow.
Your things. Your things include furniture, knick-knacks, toys, appliances, etc. Like vehicles, they generally do not appreciate. Like your home and vehicles, they produce zero cash flow.

The reason I mention the above examples is to encourage you to think of buying true assets, if your goal is to increase your wealth. True assets appreciate and may provide cash flow. Here are some examples.

Stocks and bonds. Stocks represent ownership of a company and provide cash flow via dividends. Bonds represent owning a company’s debt and provide cash flow in the form of interest payments. Additionally, you can own multiple stocks and bonds with mutual funds or ETFs – which pass the cash flows and appreciation to their investors.
Real estate. By real estate, I do not mean your home. I mean real estate that produces cash flow such as commercial properties or residential rental real estate. Real estate also provides tax advantages through depreciation, like-kind exchanges, and other business expenses.
A business. Owning a business may provide opportunities to create cash flow and potential tax advantages through business deductions. Additionally, businesses that provide value (in addition to cash flow) can also be sold for profit.
Education via college, internships, or self-education can increase your knowledge, human capital, and can increase your cash flow through promotions, pay increases, and intellectual capital.

By focusing on true assets – those that can provide cash flow and potential for appreciation can have a beneficial impact on your net worth and wealth. While it’s not a bad thing to have a home, furniture, vehicles, etc. (I own these), if your goal is to increase your wealth and net worth, consider focusing on true assets.

Posted on Dec 22nd, 2017

by author: sraskie.

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Posted in: net worth, wealth.
Tagged: net worth · wealth

Non-Spouse Rollover of Inherited IRA or Plan

Dec 18th, 2017

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Photo credit: diedoe

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

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

On top of the distinction between a spouse and a non-spouse, there is a new distinction as well: between an Eligible Designated Beneficiary and a designated beneficiary.

There are five types of individuals who make up the group of eligible designated beneficiaries. The five are:

Spouse beneficiaries
Minor child (of the original owner) beneficiaries
Disabled beneficiaries
Chronically Ill beneficiary
Beneficiary who is not more than 10 years younger than the original owner

Each of these beneficiary classes has the option of using the old-style of required distribution, utilizing the individual beneficiary’s own lifetime as the period over which to distribute the account.

If you are a beneficiary who doesn’t fit into the groups above, you are considered a designated beneficiary.

Restrictions for all non-spouse Eligible Designated Beneficiaries (EDB)

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

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

If the owner of the account died on or after his Required Beginning Date, which is generally April 1 of the year following the year in which he reached age 72 (70½ under 2019 and earlier rules), the RMD is based on the longer of: 1) the owner’s life expectancy¹; 2) the beneficiary’s life expectancy¹; 3) the oldest of multiple beneficiaries’ life expectancy¹ (if there are more than one beneficiary).
If the owner of the account died before his Required Beginning Date, the RMD is based upon the Eligible Designated Beneficiary’s life expectancy¹ or the life expectancy¹ of the oldest Eligible Designated Beneficiary if there are more than one.

The Designated Beneficiary

Other designated beneficiaries (not the EDB kind) also have the titling restriction, the same as all other non-spouse beneficiaries. In addition to the restriction on titling, the IRA beneficiary must take complete distribution of the IRA proceeds within 10 years, beginning with the year following the year of the death of the original owner.

The designated beneficiary is generally determined on September 30 of the year following the year of the death of the plan owner. In order to be named the designated beneficiary, an individual must be named on the plan documents as of the date of death (no changes can be made after death). If any person who is named the beneficiary in the plan documents is no longer a beneficiary as of September 30 of the year following the year of death, such person will not be considered as a possible designated beneficiary. This could come about if one of the original beneficiaries chose to disclaim entitlement to the account.

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

If the account is split (as described in the article about splitting inherited IRAs), each beneficiary of the inherited account(s) will be considered the designated beneficiary of that split account. This applies if the account has been split before December 31 of the year following the year of death of the original owner.

Distribution Rules for the non-EDB

It is important to note, the following rules apply as you take full distribution within the required 10 years:

you’re allowed to spread the distribution out in monthly, quarterly, annually, or any schedule of payments as long as the account is fully distributed by the end of the tenth year following the year of the death of the original owner;
if you are the beneficiary of more than one IRA, you must determine distribution timeline for each inherited IRA individually;
there is no annual RMD for inherited IRAs (unless inherited by an EDB), only the 10-year complete distribution rule.

Footnotes:

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

Posted on Dec 18th, 2017

by author: jblankenship.

Posted in: IRA, qrp, qualified retirement plan, retirement accounts, retirement plan, tax.
Tagged: IRA · tax

Divorcee Social Security Benefits

Dec 11th, 2017

2 comments

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

Divorcee Benefits Matrix

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

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

Case: Bernadette

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

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

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

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

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

Posted on Dec 11th, 2017

by author: jblankenship.

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Posted in: divorce, Social Security.

Creditor Protection for Retirement Plan Assets

Dec 4th, 2017

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

Photo credit: diedoe

Employer Creditors

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

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

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

Personal Creditors

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

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

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

Closing

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

Posted on Dec 4th, 2017

by author: jblankenship.

Posted in: creditor, IRA.
Tagged: IRA

Tough Love on Saving for Retirement (for Millennials)

Nov 24th, 2017

by sraskie.

3 comments

Periodically, I read articles that appear antithetical to the premise of paying yourself first and saving as much as you can, as early as you can to have enough saved for retirement. In the last few weeks, I’ve read two articles – one saying that traditional retirement savings for millennials is useless, and the other saying that it was ok that you’re not saving enough for retirement. Both articles mention their collective disdain for the recent tweet by Jean Chatzky saying that by the time you’re 30, you should aim to have 1x your salary saved, 3x at 40 and so on.

I happen to agree with Ms. Chatzky. In fact, you should aim to have more if possible. In my opinion, both articles disagreeing with Ms. Chatzky (as well as the replies to her tweet) seemed befitting of excuses – which are easier to agree to, and may encourage readers to not be proactive when it comes to their retirement saving.

Many of the excuses in the articles (and sarcastic replies to Ms. Chatzky’s tweets) mentioned skipping lattes, avocado toast, and how hard it can be to save given the costs of living, annual salary, when a person starts saving, and underemployment. And of course, there was the ominous student loan argument.

While I agree that all the above will impact your ability to save, I still feel that it’s very possible to have 1x or more of your annual income saved by 30 or before. It really boils down to priorities.

Think of it this way. If you tell yourself you can’t do something, or that something is too hard to accomplish, what does your mind do? It shuts down. In other words, when you give yourself excuses, it’s easy to believe them. However, by changing your words and asking yourself how could you accomplish something (saving more, for example) you automatically force your mind to think about a solution. You become proactive – not passive.

While I don’t disagree with all of what the articles say (saving what you can, getting rid of debt), they do seem to contradict themselves by saying on the one hand the traditional advice won’t work, but on the other hand to save early and often – which is as traditional as it gets.

In my opinion, sometimes people need tough love. It may rub them the wrong way, but too often articles like these pander to folks looking for excuses, instead of telling them the hard truth. At the risk of stepping on some toes, here are my thoughts.

Pay yourself first. Treat your retirement savings as the first bill you pay each month. Live off the rest. Then cut out what you can’t afford (such as dining out).
Save a minimum of 15-25% of your gross income. More if you can. Prioritize.
The little things add up and yes, they do matter. Avocado toast and lattes do make an impact. For example, at $5 per day, that’s $1,825 per year. If you invest that at 5% over 30 years that’s over $121,000 saved. The same calculations can be done with car payments, TV, phone, dining out, and other “little things”.
Underemployed? Get another job. Get a different job. Work two jobs to earn more, save more, and pay down debt. Don’t wait for your ship to come in, swim towards it.
Cost of living high? Live somewhere else. Downsize. Reduce your living expenses.
Remember, you chose your education (and the debt that came with it), career, where to live, and how to spend your money. You have the choice to change it if you’re unhappy.
Stop making excuses. Stop believing what you read by individuals who tell you it’s ok if you’re not saving or that saving advice isn’t for you (likely because they themselves cannot manage their money). These principles are timeless, and they work (ask your parents and grandparents who did it making much, much less).
Start asking yourself how you can save and or earn more. Write down the ideas that come to your mind.
Take action. The best laid plans are useless unless you act. Be proactive and take responsibility for your retirement savings. Because no one else will.

Ultimately, you have the choice if you want to save more for retirement. Find a way that works for you and keep at it. It’s really a matter of how you approach it. You’re not a victim; you can choose to be in control.

Posted on Nov 24th, 2017

by author: sraskie.

3 comments already - add to the conversation!

Posted in: rant, retirement savings, saving.
Tagged: retirement savings · saving

A SIMPLE Kind of Plan

Nov 20th, 2017

1 comment

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

Photo credit: coop

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

A SIMPLE Kind of Plan

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

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

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

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

Types of Contributions

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

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

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

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

Limits

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

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

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

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

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

Gallimaufry*

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

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

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

(* a hodgepodge of additional stuff)

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

Photo by Thomas Hill

Posted on Nov 20th, 2017

by author: jblankenship.

Posted in: IRA, rollover, SIMPLE.
Tagged: IRA · simple

Social Security Terms

Nov 13th, 2017

2 comments

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

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

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

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

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

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

Posted on Nov 13th, 2017

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: Social Security.
Tagged: Social Security

Social Security Changes for 2018

Nov 10th, 2017

by sraskie.

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In 2018, there will be some slight changes to Social Security. For individuals receiving benefits, there will be a cost of living (COLA) increase of 2 percent. While 2 percent may not seem like a lot, it certainly does help. Additionally, it’s better than nothing. That is, Social Security remains one of the few retirement vehicles available with a COLA. Many defined benefit pensions (if an individual is lucky to have one) do not have COLA increases. Their payments remain fixed for the retiree’s lifetime.

Individuals still working will see the wage base subject to the OASDI tax of 6.2 percent increase from $127,200 for 2017 to $128,700 for 2018. As always, the Medicare tax of 1.45 percent remains on an unlimited amount of wages, with an additional .9 percent tax added for those with incomes above $200,000 (single) or $250,000 (MFJ).

For individuals receiving benefits yet continuing to work, the annual income thresholds have increased for the temporary reductions in benefits. For those under full retirement age (FRA) the annual income threshold rises to $17,040 for 2018. This means that while receiving benefits in early retirement, for every $2 of income above this threshold, benefits are reduced $1. The threshold increases in the year an individual reaches FRA to $45,360. These thresholds are annual, but the calculation is done monthly per individual.

It should also be noted that once an individual reaches full retirement age, these temporary reductions stop, and the benefit is recalculated. In other words, once and individual reaches FRA, he or she can earn as much as they want, and not have their benefit reduced. It should also be mentioned that temporary reductions are in addition to permanent reductions that occur when benefits are taken before FRA.

Finally, should it make sense for their situation, individuals may consider delaying their benefits after FRA. This allows an individual to receive a two-thirds of 1 percent monthly increase, or 8 percent annually, on their primary insurance amount (PIA). So not only does Social Security have a COLA, it also allows those who delay a permanent increase in their benefit, up to 8 percent annually (until age 70), with an inflation adjustment.

Posted on Nov 10th, 2017

by author: sraskie.

Posted in: #noTOP, FRA, PIA, Social Security, social security retirement, social security tax, social security wage base.
Tagged: Social Security · social security benefits

Recharacterizing

Oct 30th, 2017

1 comment

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

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

Recharacterization of IRA Contributions

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

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

Wrinkles with recharacterizing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Photo bywoodleywonderworks

Posted on Oct 30th, 2017

by author: jblankenship.

Posted in: Early Distribution, IRA.
Tagged: IRA

Remember Your RMD

Oct 27th, 2017

by sraskie.

2 comments

It’s getting close to the end of the year and that means many individuals need to take their required minimum distributions (RMDs). It also means that there will be individuals who must begin taking their required minimum distributions as they will have reached the magic age of 70 ½.

For those already taking RMDs, check with your advisor or asset custodian and find out the amount you need to take and how you can receive payments. In most cases, RMDs can be taken in an annual amount, or monthly via check or direct deposit. The specific RMD amount is based on the account balance as of December 31^st the previous year and your age. You can use the RMD calculator found here to get an idea of your RMD amount.

Additionally, be sure to account for any taxes you might owe. For 401k type plans, 20 percent will be withheld for taxes automatically. For IRAs, you must decide how much you want withheld, if any at all. Naturally, taxes don’t apply to qualified Roth 401k or Roth IRA plans.

However, RMDs are still required from Roth 401k, 403b and 457 plans. This is not the case for Roth IRAs – which do not have RMDs at age 70 ½. Many individuals will do a qualified trustee-to-trustee transfer (rollover) from their Roth 401k to their Roth IRA to avoid RMDs.

For those beginning their first RMDs, they have until April 1^st the year following the year they turned 70 ½ to take their RMD. While this delay is only allowed in this special circumstance, individuals need to be aware that if they choose to delay until April 1^st of the following year, they’ll need to take two RMDs in that year.

For example, Rob turns 70 ½ in March of 2017. Rob can wait until April 1^st, 2018 to take his 2017 RMD. However, since Rob waited until 2018 to take his 2017 distribution, he’ll have to take his 2017 and 2018 distributions in the same year – 2018. This can have adverse tax consequences for Rob if he’s taking taxable RMDs. Depending on the amount, it could put Rob in a higher tax bracket, increase his AGI, and lower his chances to qualify for other tax deductions or credits tied to AGI.

Finally, even though you must take an RMD, it doesn’t mean you must spend it. Many individuals will reinvest the money, give to charity, or use the money to fund other opportunities – like college savings for their grandchildren. Just remember, you cannot reinvest your RMD into your 401k, IRA, or any other plan requiring “earned income” for contributions. RMDs are not considered earned income. However, the money can simply be invested in a non-qualified investment account.

Posted on Oct 27th, 2017

by author: sraskie.

2 comments already - add to the conversation!

Posted in: required minimum distribution, rmd, rmds.
Tagged: required minimum distribution

Your 401k and IRA in 2018

Oct 22nd, 2017

by sraskie.

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Recently, the IRS just announced the contribution limits for 401k plans (including 403b and 457 plans) as well as IRAs. Additionally, the IRS also announced changes to the income phase-outs for traditional IRA deductibility and Roth IRA eligibility.

Let’s start with the 401k plans. For 2018, the IRS increased the contribution limits to $18,500, up $500 from $18,000 last year. The catch-up contribution for those age 50 or over remains unchanged at $6,000. $500 may not seem like much, but think of it this way – you get to give yourself a $500 raise!

For those interested in maxing out their 401k plans in 2018, here’s the breakdown depending on whether you’re paid monthly, 24 weeks per year or 26 weeks per year. If you’re paid monthly, the contribution is $1,541.66. This brings you just eight cents under the $18,500 max annually. If you’re paid 24 weeks per year, then the amount per paycheck is $770.83. If paid every 26 weeks, it’s about $711.53. For those over age 50 the breakdown is $2,041.66, $1,020.83, and $942.30 respectively.

Since contribution limits for IRAs remains unchanged, the maximum monthly amount is $458.33 (if saving monthly) and $541.66 for those age 50 and over. Of course, if you can save the $5,500 or $6,500 all at once at the beginning of the year, that’s ideal. If not, just max it out however you can.

Deductible IRA contributions phase-outs have changed as well. For single individuals covered by a workplace retirement plan, the income phase-out is $63,000 to $73,000. Married couples filing jointly, where the IRA contributor is covered by a workplace plan, the income phase-out is $101,000 to $121,000. For married couples filing jointly, here the IRA contributor is not covered by a workplace plan but their spouse is, the income phase-out is $189,000 to $199,000.

Finally, Roth IRA eligibility phase-outs have changed as well. For single (and head of household) individuals, the income phase-out is $120,000 to $135,000. For married filing jointly couples, the income phase-out is $189,000 to $199,000.

Ideally, a single individual (under age 50) with a 401k and IRA could save $24,000 annually if maxing out both. Married couples in the same situation could save $48,000. If over age 50, an individual could save $31,000 and a married couple could save $62,000 by maxing out both their 401k and IRA.

Posted on Oct 22nd, 2017

by author: sraskie.

Posted in: 401 k 403 b, 401k, 403 b, 457, contribution limit, deductible IRA, ira contribution limits, iras, irs, Roth IRA, roth ira.
Tagged: 401k · 403b · contribution limit · financial planning · IRA · ira contribution limits · retirement savings

IRA Distribution Pro-Rata Rule

Oct 16th, 2017

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Photo credit: dido

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

So How Does The Pro-Rata Rule Work?

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

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

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

Why This Is Worthy Of A Whole Blog Post?

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

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

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

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

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

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

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

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

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

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

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

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

Posted on Oct 16th, 2017

by author: jblankenship.

Posted in: IRA, Roth conversion, tax.
Tagged: IRA · tax

Can I Retire Early?

Oct 13th, 2017

by sraskie.

1 comment

Many individuals at some point in their life and career wonder if they can retire early. First, retiring early is relative to the individual. That is, retiring early for one person may mean retiring at age 55. To another, it may mean retiring at age 30.

When teaching, I’ll ask my students what the “retirement age” is. Answers range from 65 to 70. Inevitably, I will get asked the question, “How much money do you need to retire?” And the answer is the crux of this article.

Whether an individual wants to retire can be based on several factors such as money saved, age, job satisfaction, and health. For example, an individual may never want to “retire” if they love their job, or if they find fulfilment and purpose while at work.

For some individuals, the choice to retire isn’t a choice. They must continue to work to cover expenses, health care, etc. Sometimes these individuals work until they physically cannot do so any longer. Their only retirement is Social Security.

Back to the crux. The answer I tell my students (and clients) is that how much you need to retire is a function of how much you need to spend in retirement. For example, I have seen clients needing only $38,000 annually to cover expenses and live comfortably in retirement, and half of that amount was covered by Social Security. Meaning, the clients only needed to cover $19,000 of annual expenses themselves. Based on their portfolio, they had more than enough. For other clients, their need hovered around $250,000 annually. And sadly, their portfolio would last less than 10 years.

In other words, some will be comfortable retiring with $500,000 saved, and others may find $5,000,000 will not be enough.

To retire “early” is relative to what early means for the individual and how much money they feel they would need to live on in retirement. For young individuals reading this article, it means saving a lot of money while they’re young, to reap the benefits of not working later, should you choose. For older individuals, it may mean saving much more, and perhaps cutting expenses to achieve their retirement goal. And still for others, it may mean continuing to work, since they love what they do and have no intentions to retire.

The choice is yours.

Posted on Oct 13th, 2017

by author: sraskie.

Posted in: early retirement, saving.
Tagged: financial planning · retirement savings

5 No-No’s for IRA Investing

Sep 18th, 2017

1 comment

Photo credit: jb

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

What’s Not Allowed for IRA Accounts?

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

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

Posted on Sep 18th, 2017

by author: jblankenship.

Posted in: fiduciary, investing, IRA, tax.
Tagged: fiduciary · IRA · tax

How to Navigate the Equifax Hack

Sep 15th, 2017

by sraskie.

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If you’re among the 143 million people who may have been compromised by the Equifax hack, you may be wondering what steps you can take to protect yourself in what is now the greatest data breach in history. Below are steps to take to see if you’ve been affected and what you can do to move forward with the (hopefully) least financial impact to you and your credit.

Go to https://www.equifaxsecurity2017.com/ and follow the instructions to see if your data may have been part of the compromise. If so, you’re allowed to sign up for free identity theft protection and monitoring for up to one year. Even if you’re one of the lucky ones whose data hasn’t been compromised, you’re still allowed to sign up for the service.
Check your credit reports. Go to annualcreditreport.com and request your free credit report from the three major bureaus: TransUnion, Equifax, and Experian. Regardless of the recent hack, you’re allowed (and should) do this annually to monitor your credit and the information being supplied to the bureaus. Additionally, it allows you to see if unauthorized credit inquiries are being made on your credit.
Consider a credit freeze. Freezing your credit (often for a fee) locks your credit at each bureau and requires a unique PIN in order to gain access to your file.
How to place a credit freeze. According to the Federal Trade Commission, to place a credit freeze you will need to go to the three bureaus and give your name, address, date of birth, Social Security number, along with some other information as directed. You may also be required to pay a small fee for implementation.
Direct links to the bureaus and their respective freeze pages can be found by accessing:
- - Equifax — 1-800-349-9960
  - Experian — 1‑888‑397‑3742
  - TransUnion — 1-888-909-8872
Consider signing up for identity theft protection through your home insurance carrier. Generally, for a small annual additional charge, you can have this coverage added which will help pay for the costs of fixing an identity theft should it happen to you.
Visit the three bureaus and see what additional information or free services they offer.

Equifax – https://www.equifax.com/personal/

TransUnion – https://www.transunion.com/

Experian – http://www.experian.com/

Set up a fraud alert. Contact the three bureaus above and request a fraud alert be put on your account. These last for 90 days but can be renewed.
Keep an eye on your tax return. Do your best to file early for your 2017 taxes. Once you get all of your information, try to file your taxes as soon as you can to avoid having a fraudulent return filed on your behalf.
Try to relax. As one of the individuals who may have been affected, I keep telling myself that there’s only so much I can do, and this too, shall pass. It’s easier said than done, but at the very least, you can do the best you can to be proactive moving forward.

Posted on Sep 15th, 2017

by author: sraskie.