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

Posted in: fiduciary, financial planning.
Tagged: fiduciary · financial planning

Missed Rollover Automatic Waivers

Aug 29th, 2016

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When you rollover funds from one retirement plan to another, a missed rollover occurs if you can’t complete the rollover within 60 days. A missed rollover results in a taxable distribution. However, there have always been certain specific situations that provide for exceptions to this rule, but any reasons outside that limited list required the taxpayer to request a Private Letter Ruling (PLR) from the IRS. The PLR request process could result in some significant costs for lawyers and fees.

Rev Proc 2016-47: Missed Rollover Waivers

Recently the IRS published a new procedure for handling an expanded list of exceptions for a missed rollover. This procedure, Rev. Proc. 2016-47, outlines eleven possible exceptions to the missed rollover rule. The eleven exceptions are:

an error was committed by the financial institution receiving the contribution or making the distribution to which the contribution relates;
the distribution, having been made in the form of a check, was misplaced and never cashed;
the distribution was deposited into and remained in an account that the taxpayer mistakenly thought was an eligible retirement plan;
the taxpayer’s principal residence was severely damaged;
a member of the taxpayer’s family died;
the taxpayer or a member of the taxpayer’s family was seriously ill;
the taxpayer was incarcerated;
restrictions were imposed by a foreign country;
a postal error occurred;
the distribution was made on account of a levy under § 6331 and the proceeds of the levy have been returned to the taxpayer; or
the party making the distribution to which the rollover relates delayed providing information that the receiving plan or IRA required to complete the rollover despite the taxpayer’s reasonable efforts to obtain the information.

There are some more rules that apply – such as, you must not have requested an exception in the past and that exception was denied – but otherwise it’s a self-certification. The IRS has even provided a sample letter that the taxpayer will use to provide this self-certification. The sample letter is provided at the bottom of the procedure notice: Rev. Proc. 2016-47.

Posted on Aug 29th, 2016

by author: jblankenship.

Posted in: income tax, IRA, irs, retirement plan, rollover.
Tagged: income tax · IRA · rollover

Investing Your 401k – a 2-step plan

Aug 15th, 2016

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two-steps If you’re like most folks, when you look at a 401k plan’s options you’re completely overwhelmed. Where to start? Of course, the starting point is to sign up to participate – begin sending a bit of your paycheck over to the 401k plan. A good place to start on that is at least enough to get your employer’s matching funds, however much that might be. In this article though, we’re looking at investing your 401k money. It’s not as tough as you think. In fact, it can be done in just two steps – taking no more than 30-45 minutes of your time.

Step 1 – Look at your options

When you’ve signed up for the 401k plan, review your options for investing your 401k. Look at the list of investments available – and from here you can take a shortcut if you like.

If your plan has a “target date” investment option that coincides closely with your hoped-for retirement date, start with that fund as your investment choice. This is an excellent place to start, especially when you have a relatively small amount of money in the plan. Choose this and you’re done – skip down to the “Follow up” section below.

If you’ve been participating for a while and have built up some money while investing your 401k, look at your options more closely. Among your options should be a large-cap stock fund (such as an S&P 500 index). In addition, there should be a broad-based bond fund as an option as well.

If there are multiple choices that fit those two categories, look a bit closer. Somewhere in your documentation should be information about the expense ratios of the funds. Choose the large-cap stock and bond fund with the lowest expense ratio when there is a difference.

There will likely be other investment options available to you, but for simplicity’s sake, you should just stick with these two for the time being. As you build your experience investing your 401k plan, add other investment choices to the mix.

Note: if you’re still overwhelmed, look at “Follow up” below for information about advisors to help you with the process.

Step 2 – Consider your risk tolerance

Risk tolerance is a fancy term that we financial-types use to describe how much you can stand the ups and downs of the market when investing your 401k funds. If you’re a nervous investor, watching your balance every day or week, you have a low risk tolerance; if you are a “set-it-and-forget-it” type, your risk tolerance is higher. Stocks are (generally) the more risky investment versus bonds, so if you have a lower risk tolerance your stock investment should be a bit lower. Vice versa if you have a higher risk tolerance.

Generally, when choosing between the two options we outlined above (stock and bond funds), you should select a ratio of no less than 25% of either, and the remainder of your selection should be no more than 75%.

A good starting point is 50% in each of the stock fund and the bond fund. If you’re really skittish about investing your 401k, and/or there are only a few years remaining before your retirement date, you might choose to invest a bit less in the stock fund and more in the bond fund. On the other hand, if you’re okay with the market’s up and down movements and recognize that investing your 401k is a long-term activity, investing more in stocks and less in bonds may be the better choice.

If it seems like I’m vague about this part, that’s because this part is personal and can be different for each person. Without knowing your circumstances, I can’t tell you how to invest. However, as a rule, it’s better to put more in stocks than in bonds, as this will give you a better chance of experiencing growth of your 401k plan over time. If you start out skittish and become more comfortable, you can always increase your stock investment later on.

Follow up – investing your 401k

After you’ve had some experience investing your 401k funds, you may become more comfortable with the process. Even if you’re not comfortable with it, it does pay off to review your investment options again over time. Especially if you chose the target date option above, you may want to adjust your investment process over time.

Your employer may offer access to a service to guide you through the process of investing your 401k. Take advantage of this service if you have it available.

In addition, there are plenty of books that can help you with the investment process. You’ll never regret educating yourself on investing. If it’s just not your thing, you can choose to find an advisor to help you with the follow up process. There are many advisors who can help you look over the options for investing your 401k. Many do this for an hourly fee. Even if it costs you $500 to $1000 to get this advice, it’s money very well spent. The advisor will help you understand what’s going on with your 401k.

Two good options to find advisors are the Garrett Planning Network and the National Association of Personal Financial Advisors (NAPFA). Click on the link to go to each website for more information.

Posted on Aug 15th, 2016

by author: jblankenship.

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Posted in: 401k, 403 b, investing.
Tagged: 401k · 403b · investment

Perspective on Market Direction

Aug 12th, 2016

by sraskie.

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From time to time we are asked about where we think the market is heading, whether or not another crash or “correction” is imminent and whether or not investing in the stock market is a wise investment.

To give a little perspective on this, I want to share a story with you.

In January of 1995 I was starting the second semester of my senior year in high school. Like many high school seniors, I was excited for graduation and ready for my learning to be over (oh, the ignorance!). In my senior social studies class we had an assignment. We were to pick a major, recurring news theme that we could track and report on for the entire semester.

Naturally, when the time came for us to initially report on the news theme we had selected, I had completely forgotten about the assignment and the due date. In a rush, I ran over to the stack of newspapers in the back of the class room and feverishly tore through the pages to find something relevant and recurring. By that time, other students had claimed most of the fun, easy topics. Taken topics included pop culture, sports, and others.. This left the business and financial section relatively untouched.

In my haste, my eyes stumbled on a headline: Dow at 3,838.48. At the time, this boring subject (and arguably still boring) was at least something I could report on throughout the semester. Quickly, I cut out the article, taped it to a piece of tag board and voila! – Mission accomplished.

The reason why I am sharing this is to offer perspective on what has happened over the last 20 years. Today (as of this writing) the Dow stands at 18,305 – almost 5 times its value in January of 1995! Why is this important? There are many reasons.

First, it gives perspective to individuals who worry about day-to-day market fluctuations. In other words, don’t watch the market daily. Second, it also gives perspective on how the market has weathered major events such as the October 1997 mini-crash, the Dotcom bubble bursting, 9/11, the Great Recession (Financial Crisis), the May 2010 Flash Crash and 2016’s Brexit. Third, it also lets individuals know that diversification is critical to any investment portfolio. That is, during these volatile times, other asset classes aside from stocks acted differently.

Does anyone know where the market is going? I would argue the answer is no; when time horizon is measured in days or months. For our clients, and personally, that’s why we look at long-term time horizons – in this case, just over 20 years.

Posted on Aug 12th, 2016

by author: sraskie.

Posted in: financial planning, stock, stock market, volatility.
Tagged: DJIA · Dow · financial planning · market

If your hobby makes money, read this

Aug 8th, 2016

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hobby Lots of us have a hobby – whether it’s collecting stamps, raising honeybees, restoring old Jeeps, or mounting a wild-cat – and sometimes these hobbies can produce income. If you have a hobby that makes money, you may need to claim this money as income, net of your expenses, on your tax return.

Recently the IRS published their Summertime Tax Tip with Five Tax Tips about Hobbies that Earn Income, providing useful information about income-producing hobbies. The text of the Tip is below:

Five Tax Tips about Hobbies that Earn Income

Millions of people enjoy hobbies. Hobbies can also be a source of income. Some of these types of hobbies include stamp or coin collecting, craft making and horse breeding. You must report any income you get from a hobby on your tax return. How you report the income from hobbies is different from how you report income from a business. There are special rules and limits for deductions you can claim for a hobby. Here are five basic tax tips you should know if you get income from your hobby:

Business versus Hobby. There are nine factors (below) to consider to determine if you are conducting business or participating in a hobby. Make sure to base your decision on all the facts and circumstances of your situation. Refer to Publication 535, Business Expenses, to learn more. You can also visit IRS.gov and type “not-for-profit” in the search box. You generally must consider these nine factors to establish that an activity is a business engaged in making a profit:
- Whether you carry on the activity in a businesslike manner.
- Whether the time and effort you put into the activity indicate you intend to make it profitable.
- Whether you depend on income from the activity for your livelihood.
- Whether your losses are due to circumstances beyond your control (or are normal in the startup phase of your type of business).
- Whether you change your methods of operation in an attempt to improve profitability.
- Whether you or your advisors have the knowledge needed to carry on the activity as a successful business.
- Whether you were successful in making a profit in similar activities in the past.
- Whether the activity makes a profit in some years and how much profit it makes.
- Whether you can expect to make a future profit from the appreciation of the assets used in the activity.
Allowable Hobby Deductions. You may be able to deduct ordinary and necessary hobby expenses. An ordinary expense is one that is common and accepted for the activity. A necessary expense is one that is helpful or appropriate. See Publication 535 for more on these rules.
Limits on Expenses. As a general rule, you can only deduct your hobby expenses up to the amount of your hobby income. If your expenses are more than your income, you have a loss from the activity. You can’t deduct that loss from your other income.
How to Deduct Expenses. You must itemize deductions on your tax return in order to deduct hobby expenses. Your costs may fall into three types of expenses. Special rules apply to each type. See Publication 535 for how you should report them on Schedule A, Itemized Deductions.
Use IRS Free File. Hobby rules can be complex. IRS Free File can make filing your tax return easier. IRS Free File is available until Oct. 17. If you make $62,000 or less, you can use brand-name tax software. If you earn more, you can use Free File Fillable Forms, an electronic version of IRS paper forms. You can only access Free File through IRS.gov.

IRS Tax Tips provide valuable information throughout the year. IRS.gov offers tax help and info on various topics including common tax scams, taxpayer rights and more.

Additional IRS Resources:

Publication 525, Taxable and Nontaxable Income
Publication 529, Miscellaneous Deductions
Publication 17, Your Federal Income Tax
IRC Section 183: Activities Not Engaged in For Profit (Audit Technique Guide) – details on the factors to determine ‘for profit’ or ‘not-for-profit’

Posted on Aug 8th, 2016

by author: jblankenship.

Posted in: hobby, income tax.
Tagged: hobby · income tax

Pregnant Men and Tattooed Aristocrats

Aug 5th, 2016

by sraskie.

1 comment

When you read the title to this article your mind immediately processed the words as unfamiliar and not particularly logical. After all, how many pregnant men do you see and how many tattooed aristocrats do you run into? The title was actually taken from the book, Thinking, Fast and Slow by Daniel Kahneman. I’m currently in the middle of my third time through the book and it seems like each time I read it I gain valuable insight as to how our minds work and how we perceive things.

Most notably, these words stuck with me as a way to inform our readers of other financial words and pairings they may encounter and to make readers aware that these word combinations will seem and are illogical. The goal is to help inform readers that should they see some of the following phrases, they should immediately realize that something doesn’t seem right – and is likely illogical.

High-powered Roth – If you ever encounter this phrase it is very likely in reference to a variable universal life insurance policy (VUL). These policies offer policyholders a method to invest the cash value of their premiums into underlying stock and bond mutual fund subaccounts. The cash value grows tax-deferred and may be potentially available tax-free to the policyholder. However, they are not even in the same ballpark as Roth IRAs. VULs carry high fees, expenses and surrender charges and should only be used when the underlying need is strictly life insurance, not an investment. Only in the most-rare of circumstances do they make sense for anything other than their life insurance component. If you have a salesperson who disagrees with this, ask them to use the terminology in front of a rep for the SEC or FINRA.

Life insurance as an investment – While certainly an investment in your family’s piece of mind and well-being after your death, life insurance is not an investment in the sense that it should be used as a vehicle for accumulating retirement savings or college savings. As noted above, these policies have “insurance drag” which means that the investment performance is hindered by the actual cost to insure the policy holder’s life in addition to the normally exorbitant expense ratios of the underlying sub-accounts. Additionally, it takes a very long time for the cash value to build. Max out your 401k and IRAs.

Beating the market – Beating the market is exceptionally difficult for even the most skilled fund managers. Generally, if a fund manager beats the market (very rare) it is even more difficult to consistently beat the market (extremely rare). To see how difficult this is, click here. Also note that managers that report they beat the market do so before fund expenses and fees are accounted for; hardly an apples to apples comparison. Active management is a zero-sum game. When one fund wins, another has to lose; and that’s usually the fund you’ll own.

Free lunch – This should be obvious. As they saying goes – there’s no free lunch. For that matter, there’s no free dinner or breakfast either. Often these free meals are touted to individuals to entice them to come to a seminar which is really a sales pitch. Postcard invitations to these events should be immediately thrown away. What these salespeople are preying on (or praying for) is the quid pro quo of giving you something free so you’ll feel obligated to do business with them. It’s how good-natured people get sucked into bogus investments schemes and time-shares.

Unlimited income potential – This is more directed to new or seasoned advisors looking for greener grass. Many job descriptions in the financial services industry brag about unlimited income potential as an enticement to “be your own boss” and “be in business for yourself but not by yourself”. Malarkey! In theory, this can be true. But it would also mean there’s an unlimited number of prospects, clients, hours in the day, etc. Theoretically, a stock can have unlimited potential and rise infinitely, but that has yet to happen. Your income is limited.

Downside protection, income locks (guarantees), and forecasting – These phrases are often used to sell riders and endorsements on specific products such as annuities. Downside protection generally refers to indexed annuities that offer caps on returns in exchange for protection from losses when markets go sour. However, the downside protection does not imply there aren’t fees.

Income guarantees are provided on annuities as rider to guarantee a certain withdrawal amount subject to anniversary dates and amounts in the annuity. Naturally, these are not free and the expenses of such riders need to be carefully considered before entering into such contracts.

Finally, forecasting (or any attempt thereof) the market really boils down to an educated (or ignorant) guess. However, both educated and ignorant guesses can devastate portfolios and be very expensive. Forecasting has an element of luck; and a lot of hindsight bias. It’s easy to brag about a forecast when it comes to fruition. If you hear forecasts and predictions, think of the wise words from Mark Twain, “It ain’t what you know that gets you into trouble. It’s what you know for sure that just ain’t so.”

Posted on Aug 5th, 2016

by author: sraskie.

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

Book Review: Making Social Security Work For You

Aug 1st, 2016

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This book, by my friend and colleague Emily Guy Birken, is a great book for gaining a better understanding of Social Security benefits. I recommend Making Social Security Work for You to anyone looking for answers about Social Security benefits. Birken is also the author of The Five Years Before You Retire, another excellent retirement planning tome.

Birken’s style of writing is easy-to-follow. She has a subtle sense of humor that comes out in her writing. This makes the material enjoyable to read, even for a dry subject like Social Security.

Making Social Security Work for You

I especially like the way author Birken presents the material. Having written a book on the subject, I know full well the challenge she faced when putting this information together. It is difficult to make such a technical subject understandable and engaging. Birken presents the material in a cohesive manner, with a review (Takeaways) at the end of each chapter.

Birken also does an excellent job of explaining the various benefits, timing strategies, and options available to an individual in all sorts of circumstances. There are explanations for the single filer, married couples, and divorced individuals. The information presented includes all of the changes to the rules that came into effect with the Bipartisan Budget Act of 2015. Grandfathered rules are covered as well.

Birken presents excellent examples throughout the text, which help the reader to understand the principles. These are real-world situations that are easily adapted to your own situation as you see fit.

The book rounds out with a list of the Pitfalls and Problems for you to be aware of as you plan your Social Security benefit filing. These are important to know about so that you don’t make mistakes in your filing process.

All in all – I highly recommend Making Social Security Work for You for your education process as you determine the best filing methods for yourself and your family. Emily Guy Birken has done an excellent job with this book, you can learn a lot from it.

Posted on Aug 1st, 2016

by author: jblankenship.

Posted in: Book review, Social Security, social security benefits, Social Security spousal benefit.
Tagged: book review · Social Security · social security benefits

How to Take a Frugal Vacation

Jul 29th, 2016

by sraskie.

1 comment

Vacations don’t have to be expensive. They certainly can be, but there’s no rule that dictates vacations must exceed a certain monetary threshold in order for the individual to enjoy it. Here are some ideas that readers may consider in order to take much needed vacations, but keep expenses from running out of control, the first would be considering renting a house with twiddy rentals instead of a hotel, you will see a big difference with the price at the end.

Shop around for the best deals. Some simple research while sitting in front of the TV can pay huge dividends. There are many websites that offer coupons and discounts for stays at various hotel chains, bed and breakfasts, etc. Websites such as Airbnb, VRBO.com, Expedia, etc., offer visitors the ability to search out different homes or condos that individuals have for rent (Airbnb and VRBO.com) or prices on the best hotels in the area (Expedia). Many of these sites have reader reviews that can inform the future traveler about the cleanliness, ambiance and overall satisfaction with a particular stay.

Brown bag it. Many individuals spend almost as much if not more on dining out that they do on their other vacation expenses. Add kids to this scenario and eating on vacation can get ridiculously expensive. Instead, try packing a cooler full of your essentials for the stay such as breakfast items, cooking utensils, and other food for the week. Choose a place to stay that has a cooking area and a fridge. Pack snacks for the kids from your home pantry. Often, the expense of groceries for the week will be less than one meal out at a restaurant. If packing is difficult (if you’re flying) find where the nearest grocery store is in the area you’re staying and plan for a few hours of shopping.

Travel when others don’t. Many times you’ll get the best rates when you travel and stay in non-peak times. Generally, this means during the week when others are still working. It also means avoiding the crowds and hassles of packed freeways and airports when everyone else is traveling such as major holidays and weekends. Additionally, prices are usually lower during non-peak travel times. This is true for airfare, hotels, gas, and theme parks.

Plan ahead. Just because you’re on vacation doesn’t mean you have to always fly by the seat of your pants. For example, an inquiry into the pricing of flights to a certain destination showed that airfare was over $300 less if I would have booked 6 months prior. When you’re on your stay, ask around for the best deals. Ask your hotel if they have coupons to various places. Ask locals in the area where the best places are for the best prices. Don’t be afraid to call the place you’re going to stay and bargain. Sometimes directly bargaining with the individual or place will yield better savings than the discount websites. For dining, plan your meals in advance and pack your cooler or shop accordingly.

Invest in experiences. When you’re on your vacation, do your best to invest in experiences. Think about the last time you went on vacation. If you remember anything you purchased that you regret or would not buy again, keep that focus on your next trip. Instead, focus on the experiences your money will buy. This includes precious time with growing kids, maintaining a relationship with a spouse, and creating memories that are priceless. This isn’t to say some souvenirs aren’t warranted, but be smart about it. Often these trinkets are expensive junk. I don’t need a coffee mug telling me the city I stayed.

Stop keeping up with the Jones’s! Your vacation and relaxation is not and should not be dependent on your friends’ or neighbors’ vacations. Who cares where they went and who cares what they did. Of course, be happy for them and listen when they explain their excitement, but don’t be jealous or envious. You don’t know how they paid for it or what circumstances surround it. If your peers’ vacations make you jealous or envious, see a counselor. You’ve got bigger issues.

Don’t finance your vacation with debt! As a financial planner, I’ve seen too many individuals finance their vacations with credit cards. Often, it’s a symptom of keeping up with the Jones’s. And likely, the Jones’s are doing the same thing. Instead of financing your vacation with credit card debt, save up and use that saved money for the trip. If you find yourself with little saved, then plan a less expensive trip. This may mean a small, three or four-day weekend trip instead of a two week stay. The only time credit cards should be used for vacation is to not carry cash on the trip, foreign travel, or to take advantage of discounts offered by the card company for the specific trip. A good rule of thumb, any amount put on the credit card should already be in the account where the credit card bill is paid from – in full! The credit limit doesn’t mean a spending maximum.

Posted on Jul 29th, 2016

by author: sraskie.

Posted in: financial planning.
Tagged: financial planning

A Small Step (and it’s free!)

Jul 25th, 2016

1 comment

Quick – can you tell me your net worth?

How about the balance on your credit card (okay, cards)? Your savings account balance?

Photo credit: jb

For many folks (okay, face it, most of us) the answer to those questions is only available after a multi-hour session of digging through statements, online accounts, possibly tax returns, and the like. But it doesn’t have to be that way. Getting a handle on questions like this doesn’t have to cost a lot of money, when you use free account aggregation tools.

One of the first tenets of sound financial planning involves an understanding of where we are right now. What is our current financial picture? What assets do we have? What liabilities do we owe? What is coming due soon? What income can we expect? Without an understanding of where we are, it’s hard to figure just how we’ll move toward our goal, be it financial independence, comfortable retirement, or a new home.

I have written in other posts about the various ways you can use the internet to help you with your financial records, and so in a way this is just an update. The difference is that we’re focused primarily on organizing our information here.

One very good free options that I have had experience with is Mint (www.mint.com). This type of site is commonly referred to as an “account aggregator”, meaning you will have all of your account information in one place once you’ve set things up.

Mint provides you with the ability to link all of your accounts – checking, savings, retirement, IRA, credit card, etc. – in one place. This takes a little while to set up the first time, because you have to go through all of your accounts to set up your aggregation with the passwords, account numbers, and such. Once you’ve gone through this process, you’ve got all of that information available at your fingertips, and this is where the real power of the site comes in…

Now, you can see at a glance what all of your balances are, up-to-date as of the moment you clicked on “update”. I’ve tested this out, and, while your mileage may vary, Mint has been current on activity that has happened within an hour or two. I went to the ATM and withdrew some cash, and within an hour or so I went to Mint and updated, and voila!, the account was already current.

In addition to the ability to see your balances, Mint will notify you when a bill is coming due (such as for a credit card), as well as to project your income and bills for the coming month or two. There are built-in tools that alert the user when spending in a particular category is above the norm. A rudimentary budget can be automatically built for you as well, with alerts sent to you when you spend more in a particular category than the plan, for example.

Granted, Mint is not the only aggregation tool out there, and it will probably not be the only tool you will use to organize your finances. You could also use the likes of Quicken or other checkbook-type organizers, which include online account aggregation tools as well – but many of these products comes with a price tag, albeit pretty low cost in the scheme of things.

With free tools like Mint available, there is little reason to *not* get your information organized these days. And for many folks, just getting things organized is the small step that becomes a giant leap for your personal financial situation. So get going – Aggregate!

Posted on Jul 25th, 2016

by author: jblankenship.

Posted in: financial planning.
Tagged: financial planning

Forget Your New Year’s Resolutions?

Jul 22nd, 2016

by sraskie.

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Six months ago I wrote a price regarding New Year’s resolutions. I’d like to follow up to ask whether or not readers have followed through and are making good on the promises they made at the beginning of the year. If you find yourself as one of the individuals that has put together a plan of action and you’re moving forward – good for you! If not, what happened?

Understandably, many individuals renege on their promises made at the beginning of the year. Many factors can be the culprit. From not having enough time, not making goals a priority or simply lacking a plan of action, many folks struggle to make their resolutions a reality. So how do we get back on track? Or better yet, how do we even start?

The good news is that while making good on the resolutions does take work, the plan of action is relatively straight forward.

Write down your goals. This is more than a simple “wish list” or things you aspire to do. Rather, your goals should be detailed, dated, specific and actionable. For example, a wish would be me saying “I want to save money for retirement.” That statement lacks clarity, specificity, and direction. Instead, I can write down “I save $5,500 per year to my Roth IRA. I do this by saving $458.33 monthly with automatic deductions from my checking account.” Here. I’m accomplishing the goal of saving money for retirement and I’ve given myself a specific number, and a way to take action.

Very often I hear the excuse that there’s not enough time in the day to do this or that. The problem is that if we continue to let ourselves believe that thinking, we’ll be right – and our goals won’t be achieved. Instead, why not ask ourselves how can we make the time? By asking ourselves how we can accomplish a task our brains go to work trying to figure out what it will take to succeed. Do you need more time in the day? Try setting your alarm clock one minute earlier each day for a month. Bingo! An extra half-hour of time and little effort to get there. Want more time to start a hobby, spend with your family, etc.? Turn off the TV and social media. Better yet, get rid of your cable package (it’s easier to turn off the TV when you’re not paying for it) and delete your social media account. Again, it comes down to priorities.

Just do it. Nothing happens without action. The best laid plans and goals are worthless unless we take action and make progress. Think of it this way: The Mona Lisa, Sistine Chapel, Mount Rushmore and many other glorious accomplishments all started as ideas with goals. However, they wouldn’t be present today without action. Commit yourself to working on and toward your goals on a daily basis. Every little bit gets you closer and closer to their realization.

Learn, revise, reset. Inevitably, goals will be achieved, missed and changed. It’s important that if you fail to meet a goal that you haven’t failed overall. It may mean you need to take a different approach. Failure is a good thing. It’s how we learn. Perhaps some revisions need to be made, new details added and different action taken. When a goal is achieved, celebrate and then get back to setting more goals. This builds momentum and it’s infectious. It becomes hard to stop your progress and much easier to say no to things that will inhibit your achievement.

2016 isn’t over by a long stretch. Sit down today, now, and write out a few specific goals that you’d like to achieve within the next six months. Then get moving.

Posted on Jul 22nd, 2016

by author: sraskie.

Posted in: financial planning, goals.
Tagged: financial planning · set financial goals

Withdrawals from an IRA – death, disability, and 59 1/2

Jul 18th, 2016

1 comment

Photo credit: coop

Three of the most common ways that you can withdraw funds from your IRA without penalty are: 1) reaching age 59½; 2) death; and 3) disability. Below is a brief review of each of these conditions for penalty-free withdrawal:

Reaching Age 59½ When you reach age 59½, you can withdraw any amount from your IRA without penalty, for any reason. The only thing you have to remember is that you must pay ordinary income tax on the amount that you withdraw. This means that, once you have reached the date that is 6 months past your 59th birthday, you are free to make withdrawals from your IRA without penalty. You are not required to take distributions at this age (that happens at age 70½).
Death Upon your death at any age, the beneficiaries of your account or your estate if you have not named a beneficiary, can take distributions from your IRA in any amount for any reason without penalty. In fact, your IRA beneficiaries in most cases must begin withdrawing from the IRA, taking required minimum distributions annually, or taking the entire account balance out within 5 years after the death of the original owner. See the article RMD from an Inherited IRA for more details.These distributions are taxable as ordinary income to the beneficiary, but no penalty is applied.
Disability If you are deemed “totally and permanently disabled” you are also eligible to withdraw IRA assets for any purpose without penalty. Total and permanent disability means that you have been examined by a physician and the disability is such that you cannot work, and the condition is expected to last for at least one year or result in your death.

Posted on Jul 18th, 2016

by author: jblankenship.

Posted in: 72t, Early Distribution, IRA, required minimum distribution, rmd.
Tagged: IRA

Check Your Vitals

Jul 15th, 2016

by sraskie.

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Whenever you go into the doctor’s office for a check-up what’s the first thing he or she usually does? The doctor checks your vital signs. Generally, this is heartbeat, blood pressure, breathing, reflexes, etc. Sometimes either the doctor or the nurse practitioner will have a questionnaire asking various questions such as number of drinks per day, whether or not you smoke, and any allergies – to name a few.

Most individuals give this information without thinking twice. Most of the time, the answers we give don’t change. So why does the doctor keep asking the same questions every time we have an appointment? The answer is because if one of these answers does change (such as an irregular heartbeat or high blood pressure) this changes the potential diagnoses and outcome.

This is why it’s important in your financial planning to always check your vitals. In other words, even though you think you’re financially “healthy” let the financial professional look at your auto, home, life, health and disability insurance to check coverage and liability limits. Most of the time an individual is going to be ok. However, there are times where someone thinks they’re healthy, yet their coverage is inadequate. For example, maybe the individual has comp and collision deductibles on vehicles that are old. The coverage was necessary 10 or 15 years ago, but not today. This would be the equivalent of being on antibiotics for an illness, but still taking them when the illness is cured – and continuing to pay for the prescription!

Additionally, levels of debt and savings should be checked frequently. Are debt ratios improving or getting worse? Has the savings rate changed or does it need to be changed? Someone saving $50 per pay when they were first hired may need to up that amount as they receive increases in annual salary. If they’re not asked, they can wind up with considerably less in retirement, yet their earnings allowed them to save more.

Individuals may find this hard to keep track of so it’s important that their financial professionals be vigilant in always asking. For the financial professionals, it can be difficult when they become focused on one area of planning – such as gathering assets or selling products. The point is that just like the body’s vitals, financial vitals should be checked every time individuals meet with their financial professionals. Most of the time things don’t change dramatically. But if they do, financial professionals and their clients can be better prepared to move forward with an accurate diagnosis of the situation and the appropriate prescription to remedy the issue.

Posted on Jul 15th, 2016

by author: sraskie.

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

Age 72 RMD Rules

Jul 11th, 2016

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Photo credit: diedoe

As an owner of an IRA or other qualified retirement plan (such as a 401k), when you reach age 72 (or 70½ under the pre-2020 rules) you are required to begin taking distributions from the account(s). There are several important factors about these distributions that could trip you up if you’re not careful. Listed below are some of the more important rules – but keep in mind that these RMD rules are only for the original owner of the account, not for a beneficiary of an inherited account. There is a different set of rules for inherited IRA RMDs.

Required Minimum Distribution Rules

Calculation of RMD –

Determine your account balance from the end of the calendar year prior to the year for which the distribution is being calculated. Any additions or withdrawals after December 31 of the previous year are not included in this balance, even if an addition is for the previous calendar year. Also, any “in flight” rollovers or recharacterizations that effectively would impact the end of year balance are included (or excluded) in the balance as applicable.
You must learn your distribution period, which can be found in Table III, using your age at the end of the current year (not the previous year).
Divide the balance determined in #1 by the distribution period found in #2. This is your RMD for the current year.
For each subsequent year, go back through #1 for a new balance at the end of the prior year, then go to the table from #2 to get a new distribution period, and do the math.

More Than Minimum – for any year in which you withdraw more than the RMD amount you are NOT allowed a credit against future year RMD. The result is that your balance at the end of the current year would be less, so future RMD would be less as well, but not by the amount of your extra withdrawal in the previous year.

No Rollovers or Conversions of RMD Amounts – Although you’re allowed to rollover or convert IRA funds after age 72, you cannot rollover or convert the amount attributable to your RMD for the year. This amount (the RMD) must be taken completely out of tax-deferred accounts.

Multiple Accounts – For the purposes of calculating RMD, the IRS considers all traditional IRAs owned by one individual as one aggregate IRA. This means that you can determine your RMD by adding together the balances of all your traditional (non-Roth) IRA accounts at the end of the prior year, and then taking your RMD from any one account (or as many accounts as you wish) as long as it totals at least the RMD for that year. Other qualified retirement plans such as a 401(k) must be treated separately – that is, RMD must be calculated only on that account and distribution received from only that account. Of all employer-related plans, only 403(b) plans may be aggregated for RMD purposes like IRAs are.

Multiple Payments – For the tax year, you are allowed to take from as little as one to as many payments as you wish from your IRAs, as long as they add up to at least the RMD for the year.

Posted on Jul 11th, 2016

by author: jblankenship.

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

The Value of a Stay-at-Home Parent

Jul 8th, 2016

by sraskie.

1 comment

In earlier posts we’ve discussed the importance of a spousal IRA for a spouse that stays at home taking care of the children in order to still save for retirement even though the “non-working” spouse has technically no “earned” income.

Spousal IRAs aside, I wanted to shed some light on the value of a stay-at-home parent has, even though they might not be getting paid a salary for their work raising the children. The goal is to point out why stay-at-home parents still have a need for risk management and retirement planning as they (in my opinion) work one of the hardest jobs – raising children.

According to the 2016 salary.com Mother’s Day Infographic, the value of a stay-at-home mom (parent) is approximately $143,102 annually, accounting for 40 regular hour work and 52 hours of overtime. This “salary” takes into account occupations such as driver, teacher, chef, nurse, and janitor. The site also lets the user input their own information regarding specific circumstances (honey, if you’re reading this it said you were priceless!).

Here’s why this number is so important. There have been plenty of times that I have worked with a married couple and one of the spouses was a stay-at-home parent. Generally, that individual is the wife. What is interesting is that while she is general making close to, if not more than her husband, she is severely lacking in some of the basics of financial planning – insurance and retirement savings.

Unintentionally, I’ve seen the husband with quite a bit of life insurance and various retirement accounts such as a 401k and IRA, while the wife has very little, if any life insurance and has little to nothing saved for retirement.

The question that needs to be considered is how would the family function if the stay-at-home spouse died? How would the working spouse continue working, while also caring for the children if the stay-at-home spouse could not? Even though one spouse is working, are not both spouses going to enjoy retirement? And (sorry, men) since husbands generally die before their wives, will what he’s saved be enough to support her in retirement after his death?

Ok, ok. So maybe your head is spinning. My apologies.

Although this is a lot to think about, surprisingly the remedy isn’t that difficult. After determining the amount of (monetary) value that the stay-at-home spouse provides, consider having that spouse apply for an amount of life insurance related to that amount. A ballpark place to start is ten times that annually amount. From there, determine specific needs or see a competent professional to quantify it using a human life value approach. The working spouse should consider getting spousal life insurance through their group policy at work. Although not very high amounts it’s generally easy to get and the premiums are inexpensive.

For retirement savings, take advantage of the spousal IRA option. This allows a stay-at-home spouse to contribute to an IRA as long as the working spouse has enough earned income to make the contribution. For 2016, this means that for a couple under the age of 50, the working spouse would need to have earned income of at least $11,000 for both spouses to make the maximum contribution of $5,500 each.

Although the earned income is non-existent, it’s still important to make sure plans are in place for the stay-at-home spouse. As you can see the results of not planning could leave a significant gap in a family’s plan.

Posted on Jul 8th, 2016

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning, IRA, life insurance.

Early Withdrawal of an IRA – 72t Exceptions

Jul 5th, 2016

2 comments

If you have done much studying about IRAs and 401k plans, you probably know that there 72ts1 are several exceptions in the Internal Revenue Code that allow an early withdrawal from your IRA or 401k plan without the 10% penalty being imposed. The section of the IRC that deals with quite a few of these exceptions is called Section 72t (referred to as 72t for short), and there are several subsections in this piece of the Code. Each subsection, listed below, has specific circumstances that must be met in order to provide exception to the 10% penalty. Clicking on the link for each subsection will provide you with additional details about that exception.

§72(t)(2)(A)(i) – age 59½ – this is the standard age allowing for penalty-free withdrawals from your IRA or 401k. In some cases there is an exception allowing for penalty-free withdrawals from a 401k at or after age 55; and after age 50 in even more limited cases. See §72(t)(2)(A)(v) below for more details.

§72(t)(2)(A)(ii) – death at any age – upon your death, your heirs as beneficiaries of the IRA or 401k can take penalty-free withdrawals. In fact, in most cases the beneficiaries are required to begin taking withdrawals from the account.

§72(t)(2)(A)(iii) – disability at any age – if you are disabled (per IRS definition) you may take withdrawals from your IRA or 401k without penalty. Disability (per IRS) means that you have been examined by a physician and the disability is such that you cannot work, and the condition is expected to last for at least one year or result in your death.

§72(t)(2)(A)(iv) – series of substantially equal periodic payments (SOSEPP) – this is the classic “72t” exception, allowing for withdrawals from your IRA or 401k in equal payments to last at least five years or until you reach age 59½, whichever is later.

§72(t)(2)(A)(v) – separation from service on or after age 55 (401k only) – this is the section alluded to above, where if you leave the employer during or after the year you will reach age 55, you can take withdrawals from your 401k without penalty. If you are in a public safety job (police, firemen, etc.), then this early withdrawal age is 50.

§72(t)(2)(B) – medical expenses – withdrawals from an IRA or 401k may be penalty-free if used to pay for certain qualified medical expenses.

§72(t)(2)(C) – qualified domestic relations order (QDRO) – upon a divorce settlement, if the 401k has been divided using a QDRO, the withdrawals by the spouse who is receiving the 401k (not the original owner) may be penalty-free. This only applies to 401k plans – IRAs cannot be split with a QDRO.

§72(t)(2)(D) – health insurance premiums – in certain circumstances, health insurance premiums may be paid for with penalty-free IRA withdrawals. This only applies to IRAs, not 401k plans.

§72(t)(2)(E) – higher education expenses – qualified higher education expenses may be paid for with penalty-free withdrawals from an IRA. This does not apply to 401k plans.

§72(t)(2)(F) – first time home purchase – if you have never used this exception, you may be eligible to withdraw up to $10,000 ($20,000 if your spouse qualifies) from your IRA for the purpose of purchasing a first home. This is also only allowed with an IRA; 401k plans do not allow this exception.

Posted on Jul 5th, 2016

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: 401k, 72t, Early Distribution, early retirement, IRA, qualified retirement plan.
Tagged: IRA

5 Options for Your Old 401k

Jun 27th, 2016

2 comments

When you move from one job to another, often there is an old 401k plan at the former employer. You have several choices for what you can do with the old 401k plan, and some options are better than others. Some of the options are dependent upon the balance in your old 401k account, as well.

Cash it out. This is typically the worst option. You took advantage of tax-deferral (and company matching) when you contributed the funds to the account. If you simply cash out the old 401k, you’ll have to pay tax on the funds, and if you were under age 55 when you left the employer you will also likely be hit with a 10% penalty for the early withdrawal.

In addition to the tax and penalty, when you take a withdrawal from your 401k plan there is an automatic 20% withholding requirement. You will have credit for this withholding on your tax return, but that could cause a delay of many months before you receive the money.

If your old 401k balance is less than $1,000, your employer has the option to cash out your account without your consent. But all is not lost, you can still complete a rollover into an IRA or a 401k at a new employer – but it must be completed within 60 days (see Indirect Rollover below).

Indirect Rollover. An indirect rollover occurs when you request a distribution of the funds from the old 401k to be given to you in the form of a check made out to you. This is (at the start) the same as cashing out your old 401k – but then you re-deposit the check into an IRA or a new employer’s 401k. If you deposit the entire amount of your old 401k into a new tax-deferred account, there will be no tax ramifications.

This is where the previously-mentioned 20% withholding can cause problems. As mentioned before, when you take a cash-out withdrawal from your 401k there is a mandatory 20% withholding. When you go to re-deposit the funds, in order to avoid taxation you’ll need to come up with the withheld 20% to make the rollover complete.

For example, Laura left her former employer, where she had a 401k plan. This old 401k had a balance of $25,000. Laura wanted to do an indirect rollover – so she asked for a check from the 401k administrator. When she receives her check, the amount is only $20,000. This is because 20% was withheld, as required.

So when Laura completes the indirect rollover, unless she comes up with the missing $5,000 from her savings or some other source, the result will be that she has only rolled over $20,000 – and when she pays taxes for the year, she’ll have an extra $5,000 of income to report. Since Laura was under age 55 when she left the employer, she’ll also have a 10% penalty to pay. Granted, she has the credited $5,000 of withheld tax, but the end result is that her retirement fund is $5,000 less and she had to pay tax and a penalty on the unintended withdrawal.

For this reason alone it’s almost always better to do a Direct Rollover.

Direct Rollover. This is where you direct the old 401k administrator to transfer the funds to either an IRA or a 401k at a new employer. In doing so, the funds have never left the “protection” of a tax-deferred account, so there is no taxation or penalty involved.

In the case of either a direct or indirect rollover into a new employer’s 401k plan, you’ll need to make sure that the new 401k plan allows for this sort of “roll-in” contribution. Most plans do allow this, but some still don’t.

Once you have completed the rollover (either kind) you can then invest the funds in the new account as you wish, and treat the entire account as if it was contributed from your deductible contributions.

Leave it alone. In some cases it can be advantageous to leave the money in the old 401k plan. Typically this is only allowed when your balance is significant, often around $5,000 or more.

You might want to leave the funds at the old employer for a few reasons: first, if you left the employer at or after the age of 55 (but less than 59½), leaving the money with the old 401k provides you the option to utilize the age 55 exception to the 10% penalty. If you transferred the money away from the old 401k you would lose this treatment.

Second, your old 401k may have valuable investment options available that may not otherwise be available to you, such as investments closed to new investors.

Third, if you have highly-appreciated company stock in the old 401k plan, if you don’t stage a rollover properly you might lose valuable tax treatment on the net unrealized appreciation on the stock.

Roth conversion. In addition to the traditional rollovers described above, you can also convert the money to a Roth IRA. Naturally this will cause income tax on the conversion, but depending upon the tax situation this can be a good option to pursue.

You would just transfer the money over to the Roth IRA account and pay tax on the distribution on your tax return for the year. Then you’ll have money in the Roth account that is protected from taxation on qualified withdrawals forever.

Posted on Jun 27th, 2016

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: 401k, 403 b, 457, qrp, qualified retirement plan.
Tagged: 401k · qrp · qualified retirement plan

How to Really Buy a Car

Jun 24th, 2016

by sraskie.

3 comments

2016-06-21-14.38.47-1024x576 Buying a different car (notice I didn’t say new car) is an event many individuals experience throughout their lifetime. Personally, I have had a number of cars in my lifetime, and I’m sure I’ll have a few more (right now the ol’ mini-van stands at 241,000 miles). My goal is not to spend too much on a depreciating asset, yet make a sensible purchase based on reliability, fuel efficiency and insurance costs. Although some readers may not agree with me, here are some tips on how to really buy a car.

Do your homework. Websites such as Kelly Blue Book (kbb.com) and Edmunds.com have valuable information on used car prices, reliability reports, known recalls, expert and buyer reviews and what to expect at the dealership. In addition, obtaining information from these websites gives you bargaining power when you go to purchase your vehicle at a dealership or from a private party.

Never, ever walk into a dealership and tell them your monthly payment you’re hoping to get. In fact, don’t tell them if they ask you. Instead, negotiate the price of the car first. Many dealerships are more than happy to get you the payment you want, while not helping you consider total cost, interest on financing, etc.

Try to never, ever have a car payment. Think of it this way, you’re making monthly interest and principal payments on a depreciating asset. If you can, hold off on the purchase until you’ve saved enough cash to buy the car outright. This also gives you more negotiating power knowing you can walk away from the deal and buy the same car at a different dealership. And no, you don’t need a new car every five years.

Don’t buy the hype. Just about every dealership offers the same discounts and pricing. The reason is that other than freight charges, most dealerships pay the same for the new vehicles going on their lots.

If you can, avoid buying new car. Consider this; an individual making $100,000 in annual income who purchases a $30,000 new car just spent 30% (nearly a third) of their income on a depreciating asset. There are plenty of reliable, used cars that are in perfect working condition. In fact, take advantage of the fact that the used car has already had much of its depreciation absorbed by the previous owner. Furthermore, I have seen too many individuals buy a new car, finance it, then end up upside down on the car. This means they owe more than the car is worth. To make matter worse, some individuals wreck their cars, have nothing to drive, yet still have to make payments. Ick.

Buy your car before you have I’m not suggesting you buy a car you don’t need. What I am suggesting is that you have the car you want ready to purchase when you need to. That is, if your current vehicle breaks down or is no longer running, you know you can get the vehicle you researched, instead of making a fast, emotional decision that will likely cost you more money.

Avoid leasing. This never made sense to me. Often the rationale is “if you want new car every three years, then leasing is the way to go.” Baloney. Leasing is simply making a car payment on an asset you don’t Save up and buy the car outright. As mentioned earlier, if you don’t need a new car every five years, you certainly don’t need one every three.

The exhilaration of the purchase wears off fast. Buy a car that’s affordable, practical, reliable, and fuel efficient. Forget about what the Joneses have or what they think. Take what you would have paid for the monthly payment and put it toward retirement, college, or saving for a house.

Insurance matters. Especially if you’re young, insurance on vehicles matters. The price of insurance on a used sports car is much more expensive than a used sedan. In addition, lenders will often require that you have insurance to protect their asset (it is theirs since you borrowed their money to buy it) including comprehensive and collision which adds to premium amounts. Generally, the older, less sporty the car, the lower insurance premiums.

Avoid the extended warranties. In most cases, these warranties are not needed. Instead, use the aforementioned sites to research the vehicle’s reliability so you don’t need to purchase the warranty. Finally, should a major repair be necessary, simply use your emergency fund or rainy day fund to pay for the repairs. Also, a major repair doesn’t indicate you need a new vehicle. Quantify the cost of the repair versus a purchasing a different vehicle. Often, the price of the repair will outweigh purchasing a different vehicle altogether. Sometimes, repairs can be made by you. With a little elbow grease and YouTube you’d be surprised at what you can do, and how much you can save.

Posted on Jun 24th, 2016

by author: sraskie.

3 comments already - add to the conversation!

Posted in: buying a car, financial planning.
Tagged: buying a car

Qualified Plan Rollovers

Jun 17th, 2016

by sraskie.

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2015-08-03-09.15.09-300x169 Combining and rolling over various retirement accounts is a decision that many individuals will face during their working career and in retirement. For individuals that are already retired, they may consider combining accounts to make required minimum distributions a bit easier (less paperwork, companies to deal with, etc.). Individuals that are still working may consider combining accounts as they switch jobs in an effort to consolidate plans from various employers to their IRA, Roth IRA or current employer plan. What follows are some considerations as well as a handy guide form the IRS regarding what rollovers and consolidations are allowed and specifics for each plan type.

Be sure to check the fees of the plan you’re coming from to the plan you’re considering moving to. While consolidation may make sense, it may be a bad idea if the expenses of the plan and funds are higher in the plan you’re moving to. For example, if a former employee’s 401k is invested in funds that have relatively low expenses and fees, she may be better off staying put if their current employer’s plan doesn’t offer such low cost options. The same is true regarding their current IRA. However, this can easily be remedied. She can simply open a new IRA with a low-cost provider such as Vanguard and combine the monies to that account when applicable.

Check to see if the plan you’re rolling into or out of allows rollovers (they generally do). However, some plans require special considerations. For example, the 457b allows rollovers from other plans, but requires separate accounts for the money being rolled in (if other than another 457b plan). Additionally, SIMPLE IRAs require the account be established for at least 2 years before any transfers out are allowed – regardless of employment status.

Be cognizant of the tax implications of your rollovers. While many plans allow rollovers and consolidations, the individual needs to consider the tax implications. For example, if an employee wanted to roll their pre-tax 401k to a Roth IRA they are certainly allowed to do so. However, they will pay tax on this “conversion” since the money is moving from a tax deferred to a tax free account. Roth accounts on a 401k, 403b, or 457b also have required minimum distributions at age 70 ½. This can be avoided by rolling the money to a Roth IRA.

Finally, here’s the handy chart courtesy of the IRS. This gives some general guidelines and should be able to help with many of our reader’s questions regarding what retirement accounts can be rolled where. For more specific questions, feel free to contacts us.

Posted on Jun 17th, 2016

by author: sraskie.

Posted in: 401 k, 401 k 403 b, 401k, 403 b, 457, IRA, ira account, qualified retirement plan, rmd, rmds, rollover, roth ira conversion.
Tagged: 401 k · 401k · 403 b · 403b · retirement plan · rmd · rollover

Net Unrealized Appreciation

Jun 13th, 2016

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Photo credit: malomar

This widely misunderstood section of the IRS code can be quite a benefit – if it happens to fit your situation. Net Unrealized Appreciation (NUA) refers to the increase in value of your company’s stock held within your 401(k), either due to a company match or your own investment in the company stock within the 401(k). Other company-sponsored deferred accounts can apply here as well, but the primary type of account is the 401(k), so we’ll refer to all company-sponsored tax-deferred accounts as 401(k)’s for the purpose of this discussion.

In order to take advantage of the Net Unrealized Appreciation provision, first of all you must hold your company’s stock in your 401(k), and you must be in a position to roll over the account. That is, either you must have separated from service by leaving employment (voluntarily or involuntarily), or the 401(k) plan is being terminated.

As you consider the rollover of your funds, if the company stock has increased in value, you have net unrealized appreciation. That is, there is a net increase or appreciation in value that has not yet been realized by sale of the stock. The IRS allows for this net unrealized appreciation to be treated as a capital gain, which can result in much lower tax rates on the gain versus ordinary income tax rates.

In order to take advantage of this special NUA treatment, the 401(k) account must be completely rolled over in one tax year. There is one thing that you must do differently from other rollovers, however: The company stock will be rolled over into a taxable (non-IRA) account, while everything else will be rolled over into a traditional IRA.

When you rollover the company stock, this will be considered a distribution. As with any distribution, you will be required to pay the tax on the basis (or cost) of the stock as well as the 10% penalty if you were under age 55 when you left the employer. Your employer or plan administrator will have records on your basis of the stock.

As an example, let’s say Frank has participated in the company’s 401(k) plan for several years and he’s now ready to retire. Part of the 401(k) funds were invested over the years in Frank’s company’s stock, which has cost Frank a total of $10,000 through the years (this is the basis). Frank’s company has done well, and now the stock is worth $150,000 in the market. If Frank rolled over the company stock into an IRA, when he withdraws the money he would pay ordinary income tax on that growth of $140,000 – at whatever his current marginal income tax rate at that time. Instead of going that route, Frank decides to use the NUA provision in the tax law – much to his advantage.

So, Frank sets up an IRA and a taxable account at the custodian of his choice, and he directs the 401(k) administrator to roll over his company stock to the taxable account, and all other funds to the IRA. When Frank rolls over the company stock into the taxable account, he will be taxed at ordinary income tax rates (plus the 10% penalty if he was under age 55) on the basis of the stock – which is $10,000. Now, not only will the growth of the stock ($140,000) have a tax rate of 15% or less as capital gains, Frank also will not have to take required minimum distributions (RMD) from those funds upon reaching age 70½ . Frank can leave the company stock in that taxable account forever if he wishes, and then hand it over to his heirs. (Note: NUA stock doesn’t receive a step-up in basis like other appreciated stock.)

Here’s the math: Frank pays tax at an example rate of 25% on the $10,000 basis of the stock, or $2,500. Frank is over age 55, so no 10% penalty applies. Then, as he sells the stock, the total amount of capital gains tax would be 15% at today’s rates of $140,000 (just the growth!) or a total of $21,000. Compare that to the non-NUA treatment, where Frank would be taxed with ordinary income tax rates on the entire $150,000 stock value over time, for a total of $37,500! In this example, Frank has saved a total of $14,000 in taxes! Wow…

Now, NUA treatment doesn’t work for all situations. For example, if your company stock has only grown minimally in value, or has gone down in value, there is little or no benefit to utilizing the NUA option. Also, if the basis of the stock is fairly high relative to the growth, it might make sense to only apply NUA treatment to a portion of your company stock, which is also allowed. One last thing – this NUA treatment only applies to the stock of your employer. No other stock can receive this treatment.

Posted on Jun 13th, 2016

by author: jblankenship.