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Maximize your Social Security benefits by changing your thinking

May 15th, 2023
by jblankenship.
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Photo credit: jb

When it comes to Social Security retirement benefits, many folks look at the payments as something they’ve earned… and that’s not totally off base if you happen to receive benefits, because the amount of the benefit that you receive is a direct result of your earnings over your career. But really, Social Security is something else altogether. 

Technically, Social Security retirement benefits are referred to as “Old Age, Survivors and Disability Insurance”, or OASDI for short. I emphasized Insurance there, because that’s what it is. It’s not an investment, because there’s not an account with your name on a pile of money, just waiting for you to retire. Rather, this is an insurance program, specifically insurance against living longer than the average.

Like any other insurance plan, you pay in premiums (in the form of payroll taxation), and if you live to the appropriate age, you may receive a benefit from the plan. If you live longer than average, you might receive more in benefits than you ever paid in; on the other hand, if you don’t live long enough you might not receive any benefits from the plan, or very little benefits. In this case, your premiums go to paying for other insureds who do live longer. In addition, your spouse or child beneficiary(ies) may be eligible for benefits based on your record.

That’s how insurance works. Let’s draw a comparison to auto insurance. With auto insurance you pay monthly premiums to the insurance company, and if you have damage to your vehicle, or some other type of claim like damage to someone else’s property or medical expenses associated with an auto accident, then the insurance company pays for your damage, to a limited degree (after deductibles, and within plan limits). 

Much the same as the description of Social Security, if you don’t experience an event and therefore don’t submit a claim, you won’t get any payments from the insurance company. Likewise, if all you ever had was a cracked windshield, you’d get much less payback than someone who totaled their car. Your premiums then are used to pay for folks who have experienced events and submitted claims for reimbursement.

No one goes into the agreement to purchase auto insurance with the express intent to get their money back out of the policy (well, at least no non-sociopaths). 

So what are the similarities?

  • You pay in premiums to both an auto policy and Social Security
  • You pay these premiums to protect you against an event. In the case of auto insurance, it’s to help pay for damage to the car (among other things). Social Security protects you against living longer than you otherwise have money to cover.
  • In both cases, the premiums of folks who don’t have claims (or fewer claims) are used to cover the claims of folks who experience the event being insured against.

With Social Security, assuming that you’ll live to the “average” (as determined by actuaries) age of around 82, you’ll receive a similar amount of retirement benefits no matter what age you start receiving those benefits. (There may be slight differences depending on the relative ages of a married couple but we won’t focus on that for now.) We might consider the amount received by about 82 to be the “base” amount of benefits.

But unless you have a reason to believe your lifespan will be something less than average, I’d guess that most folks are at least hoping to live some amount of time beyond the average. It’s that time beyond the average that makes the decision about the age to begin receiving Social Security retirement benefits so important. (Keep in mind that the lifespan of your spouse might be the important factor here as well, if your spouse is eligible for survivor benefits and outlives you.)

The relationship between the amount of Social Security retirement benefits and the age you file for those benefits is that, the longer you delay (between the earliest filing age of 62 and the latest age of 70) the larger the monthly benefit you will receive. And subsequently, if you live past the average age mentioned above, each month of delay results in a larger lifetime benefit, maximized if you delay to the latest filing age of 70.

Usually, delaying filing for Social Security benefits to age 70 requires a trade off somewhere – maybe you’ll have to take more money out of your IRAs or other retirement savings earlier than you’d expected, or you might need to work longer than planned. Either of these options can bridge the gap between the earliest filing age and the latest filing age in order to help you maximize your Social Security benefit.

Since Social Security retirement benefits are tax efficient, cost-of-living-adjusted, guaranteed (don’t sacrifice me on the guaranteed part, we’re not talking about policy here), and infinite (once you start receiving the benefit you’ll receive it for life), it makes a great deal of sense to maximize that monthly benefit amount. Especially so if you plan to live past “average”.

Think about it – above we mentioned a “base” amount of money you’ll receive from Social Security benefits by the average age of death, around 82 years of age. So if you’re average, you’ll get the base amount of money, and that’s all. If, unfortunately, you don’t live as long as the average, you won’t get as much in benefits – that’s the way it works, some folks don’t win the lottery of life. 

But if you live longer than the average age, every single month’s benefit is a bonus above the base. So again I ask, if you are expecting to live longer than the average, why wouldn’t you try to maximize the amounts that will be, essentially, your bonus?

For a minimized example, let’s say other than your Social Security benefits you have IRA funds and other sources that just make up the difference between your living expense needs and the amount you’ll receive in Social Security benefits. When you get to age 83, you’ve expended all of your other sources completely, and now all you have is Social Security to live on – doesn’t it make sense that you should have maximized this benefit, so that as your life expectancy goes onward you’ll have the largest possible monthly benefit?

I should point out that in a case like the above minimized example, you should probably take some other action earlier, like working longer, or finding ways to reduce your living expenses. Otherwise when you outlive your savings you may be faced with some difficult decisions and be forced to take on a spartan lifestyle by comparison.

Arguments against delaying:

  • I don’t have enough money saved otherwise to get me through to the later filing age.
    • Not much to counterpoint this with. If you don’t have the resources to delay, you may have no choice but to either file for Social Security earlier, or continue working (or pick up a part-time job) in order to cover your living expenses. Another viable alternative is to reduce expenses somehow – downsizing your home, lifestyle, etc., or selling some of your “things”.
  • I don’t want to use my savings so early in my life! I’ve saved all these years, using it to delay filing only draws down how much money I’ll have for later on. (Also – I want to leave something from my retirement account for my heirs!)
    • (building off the prior answer) If you have at least enough funds to get you through to the later filing age, you should use those less attractive funds (fully taxable, not guaranteed, not cost-of-living-adjusted, and finite – there’s only so much in the pot) to allow yourself to maximize your Social Security benefits. Face it, if you’re that close to the edge with your savings, you need Social Security benefits to be as large as possible.
    • Besides, you saved that money for a reason – to help pay for your retirement. That’s exactly what you’ll be doing as you use these funds to live on while delaying Social Security filing.
    • Regarding leaving something to your heirs, if it comes down to paying for food versus leaving that inheritance behind, you know what the choice is going to be. If you live longer than your money can last, the heirs will be the last thing on your mind.
  • I can do so much better with my own investing than Social Security can. I’ll take the benefits early and invest them to maximize my possible income stream for later in life.
    • First of all, delaying results in an increase to your monthly benefit amount by anywhere from 6%-8% for each year of delay, guaranteed. (That guarantee should have no arguments). If you can guarantee a return of 6%-8% every year, you’re a genius and you have no business reading such mundane articles as this. Go solve world hunger, why don’t you?
    • Secondly, unless you’re extremely well disciplined, this concept of “I’ll invest it all” is sham and you’re likely fooling yourself. Very few people could put this into action, and then you’ve still got the guaranteed 6%-8% factor mentioned above to overcome.
    • Actually, in the long run, that 6%-8% increase works out to much more, due to the fact that as long as you live you’ll continue receiving your Social Security benefit. Think about how that can play out if you live to 90, 95, 100, or 110!
  • What if I don’t live to age 82 (or age 70)? Then all of that money is just wasted. My uncle (or cousin, brother, neighbor, etc.) worked his whole life paying into Social Security and died at age 61½ (or 69, etc.) and got nothing.
    • Just the same as with auto insurance, in some cases you pay into it for a long time and never make a claim. In other cases you have (heaven forbid) a terrible auto accident and have huge medical, property, and auto replacement claims, which are paid by your auto insurance. With Social Security retirement benefits, there’s always the possibility that you might not get any benefit, or very little in the way of benefits over your lifetime if your life is shortened by an untimely death. It’s the gamble that you take, to ensure that you’re covered in the event of living longer than expected.
  • I’m filing as early as possible to get my money back.
    • Keeping with our comparison to auto insurance, often there are small possible claims that you could submit, like a door ding from a parking lot. Auto insurance has disincentives to discourage these small claims – submitting and being paid for these small claims will result in an increase to your premiums. Social Security’s disincentives apply when filing earlier in your life – you’ll receive a smaller monthly benefit amount when filing sometime before the maximum age.
  • Social Security is going broke. I’m filing now (or as soon as possible) while it’s still available.
    • Suffice it to say – if you feel this way, then by all means, go ahead and file whenever you want to. I disagree with your viewpoint, but I will not argue it, experience tells me that this point of view is not likely to be changed so I won’t try.

We didn’t cover the nuances involved with spousal benefits, dependent benefits, or survivor benefits. These auxiliary benefits could impact your filing decision in either direction, and coordination of all available benefits is necessary to achieve an optimal outcome.

Posted on May 15th, 2023
by author: jblankenship.

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Posted in: financial planning, Social Security.

ABC’s of Medigap Policies

May 8th, 2023
by jblankenship.
6 comments
medigap

Photo credit: jb

Medigap policies come in many flavors. If you’ve done any reading in this area at all, you’ve probably come to realize that the whole thing is a messy alphabet soup… and it’s really, really hard to figure it all out. If you want more details on the choice between Medigap and Medicare Advantage plans, see the article Medicare Supplements versus Medicare Advantage Plans.

What I’ve done here is to pull together a resource that may be helpful as you consider your options for a Medigap plan.

The ABC’s

Unless otherwise noted, the coverages are 100% of the item listed.

Plan A covers:

  • Medicare Part A coinsurance hospital costs up to an additional 365 days after Medicare benefits are used up
  • Medicare Part B coinsurance or copayments
  • Blood (well, the first 3 pints anyhow)
  • Part A Hospice Care coinsurance or copayment

Plan B covers:

  • Everything covered by Plan A, plus:
  • Medicare Part A deductible

Plan C covers:

  • Everything covered by Plan B, plus:
  • Skilled nursing facility care coinsurance
  • Medicare Part B deductible
  • Foreign travel emergency (80%, up to plan limits)

Plan D covers:

  • Everything covered by Plan B, plus:
  • Skilled nursing facility care coinsurance
  • Foreign travel emergency (80%, up to plan limits)

(in other words, everything in Plan C except the Medicare Part B deductible)

Plan E is no longer available as of May 31, 2010

Plan F covers:

  • Everything covered by Plan C, plus:
  • Medicare Part B excess charges
  • Plan F also offers a high-deductible plan as well, in some states

Plan G covers:

  • Everything covered by Plan D plus:
  • Medicare Part B excess charges
  • Plan G also offers a high-deductible plan as well, in some states

(in other words, everything in Plan F except the Medicare Part B deductible)

Plans H, I, and J are no longer available as of May 31, 2010

Now we’re getting to some of the more flexible plan options.  These have been developed to provide similar benefits as other plans but with additional participation by the insured in order to reduce the premium costs.

Plan K covers:

  • Everything covered by Plan D with the following exceptions:
  • Foreign travel emergency is not covered
  • There is a 50% coverage on the following:
    • Medicare Part B coinsurance or copayments
    • Blood (again, just the first 3 pints)
    • Part A Hospice Care coinsurance or copayment
    • Skilled nursing care facility coinsurance
    • Medicare Part A deductible
  • There is a yearly out-of-pocket maximum for all coinsurance and copayments of $6,940 (for 2023).  After this has been met (along with your annual Medicare Part B deductible), the plan pays 100% of each covered service.

Plan L covers:

  • The same coverage as Plan K except a 75% coverage on the items at 50% coverage in Plan K
  • The yearly out-of-pocket maximum for Plan L is $3,470 (for 2023), with the same detail as Plan K otherwise

Plan M covers:

  • Everything covered by Plan D with the following exception:
  • Medicare Part A deductible is only covered at a 50% rate

Plan N covers:

  • Everything covered by Plan D with the following exception:
  • The Medicare Part B coinsurance or copayment is covered 100% except for copayment for some office visits and some emergency room visits

							




				Posted on May 8th, 2023
				
by author: jblankenship. 


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Posted in: Insurance, Medicare.

							
			


		

		
				
		

			
			
Book Review: Nutshells – Planning Strategies for a Tax-Free, High-Income Retirement

			
			

				Apr 24th, 2023
				
by jblankenship. 

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Nutshells
Photo credit: jb





Had an opportunity to read a new book over the tax season (in my spare time!). I found this book, by Jasen Dahm, CFA, CPA, to be a very good review of strategies to maximize your income and avoid taxes where possible, while planning your retirement income stream.


In today’s world, we’re for the most part on our own when it comes to planning our retirement income. Gone (mostly) are the days of company pensions taking care of the lion’s share of our retirement income needs. In the place of pensions are many different options, including 401(k), IRA, Roth-type accounts, Social Security, and insurance products, plus some outliers such as Health Savings Accounts and 529 plans. With proper planning, it is possible to maximize your retirement income stream, minimizing taxes along the way. This book is a very good guide to understanding the principles that can help you along that path.


Too often the tax-reduction concept is relatively short-sighted in most retirement planning models. When taken in the context of a lifetime process, real value can be provided with strategic planning.


Dahm uses excellent examples throughout the book to illustrate the concepts, with three different case studies that continue throughout the book. As each new concept is unveiled, the concept is applied to each of the case studies, with very good explanatory effect. These case studies are especially valuable to drive home the benefits of the strategies the author is explaining.


The goal is to produce a tax-free, high-income retirement. For most, the “tax-free” part is highly unlikely, but certainly possible, as illustrated by the author. (Personally, I’ll settle for a tax-reduced income, aiming toward tax-free if the circumstances work out properly!)


As is the bane of all financial writers, myself included, there’s nothing especially new in this book – very little changes about the mechanics of retirement investing and the like. However, the author uses his examples to provide what are perhaps some new insights into ways to strategize your initial and ongoing investment activities, as well as how to efficiently and effectively draw the funds from the various sources when the time comes.


I found this book to be an excellent primer for an all-around review of the options available to retirement investors, with extra emphasis on a few options that many gloss over.


For example, Dahm spends a good bit of time explaining the benefits of LIRP (life insurance retirement products), a topic that usually doesn’t get much emphasis if the writer isn’t vested in insurance sales. And if the writer is selling insurance, you wouldn’t typically get such excellent information about all of the other types of accounts that Dahm has painstakingly reviewed and explained here. (I have no idea if Mr. Dahm is in the business of insurance sales or not. Regardless, he does a good job of explaining the benefits without selling products. Kudos!)


In addition, the author also explains how to fit Health Savings Accounts (HSAs) and 529 plans into the overall scheme, something that often gets short shrift from many other authors. HSAs are often seen as an “extra” for many folks, and they’re often unsure of the benefits of such accounts. In this book, you can learn how these accounts and 529 (college savings) accounts can be integrated into your lifetime tax-saving activities, right alongside your 401(k) and other retirement saving activities.


All in all, I would highly recommend this book for investors (novice to experienced) and advisors. There are gems to be found within, and even if all of the concepts are well-known to the reader, I bet you’ll gain something by the review and fresh insight from this talented author. Novice investors can use this as a jumping-off point for understanding all of the options available to them; experienced investors can gain new insights into strategic asset positioning. Advisors will probably learn a thing or two as well.

							




				Posted on Apr 24th, 2023
				
by author: jblankenship. 


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Posted in: Uncategorized.

							
			


		

		
				
		

			
			
Your Retirement Plan and Where You Live

			
			

				Apr 3rd, 2023
				
by jblankenship. 

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2006_zonesWe’ve covered a lot of ground with regard to how various tax laws impact your retirement plans: pensions, IRAs, 403(b) and 401(k) plans. But we’ve primarily focused on the US income tax laws (the IRS) affect your plans – and there are many nuances that you need to take into account with regard to state tax laws.


State Tax


The big deal with state tax laws and retirement plans is that some states have special tax deals for money inside of retirement plans. If you happen to live in (or are planning to move to) such a state, it makes good sense to understand any special nuances in the tax laws before doing anything.


This is due to the fact that, for example, it could make a huge difference in the tax impact if you cashed out a plan in one state versus another. Here in Illinois, there is no state tax on retirement income – whether from a pension plan, from an IRA or from a 401(k), as well as Social Security benefits. The same is true for Iowa, Mississippi and Pennsylvania. So if you are planning to move to Illinois (for example) for retirement – it would pay off if you wait until you move to your new home before withdrawing IRA assets, especially if you’re moving from somewhere with a high state income tax.


In addition to those states, there are 9 states that have no income tax at all – therefore those states also do not tax retirement income. These nine states are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming.


Some states with an income tax will provide certain exemptions for retirement income. For example, twenty-six states exempt military retirement pay from income tax (Alabama, Arizona, Arkansas, Connecticut, Hawaii, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, New Jersey, New York, North Carolina, North Dakota, Ohio, Oklahoma, Pennsylvania, Utah, and Wisconsin). Nine more states only partially tax military retirement pay (Colorado, Delaware, Idaho, Kentucky, Maryland, New Mexico, Oregon, South Carolina, and West Virginia, plus the District of Columbia).


Social Security benefits are untaxed by most states. Only Colorado, Connecticut, Kansas and Minnesota tax this income, and most of these have some formula for at least a partial exemption.


So pay attention to, and get acquainted with, the tax laws in your state and any states you’re considering for a new home (either in retirement or at another time in your life) so that you don’t miss out on any tax treatment – or worse, make a move that precludes some tax treatment from being available. You might want to plan your distributions until you get to the new state, for example, if retirement income is untaxed there.

							




				Posted on Apr 3rd, 2023
				
by author: jblankenship. 


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Posted in: financial planning, IRA, retirement plan, tax.

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Roth Conversion While Receiving 72t Payments

			
			

				Mar 27th, 2023
				
by jblankenship. 

				2 comments							

			
			

								
converted
Photo credit: jb


With all of the conversation going on with regard to Roth IRA Conversions, I thought it would be useful to address a special set of circumstances with regard to Conversions. As the title implies – we’re talking about the eligibility of an IRA for conversion if it is also subject to a Series of Substantially Equal Periodic Payments (SOSEPP), commonly referred to as 72t payments. For background on SOSEPP, you can see the article Early Withdrawal of an IRA – Series of Substantially Equal Periodic Payments.


As you know (if you’re read the article about Penalties for Changing SOSEPP) it can be costly to you if you make a change to your SOSEPP once you’ve set it up. The good news is that a Roth Conversion is NOT considered a “distribution for purposes of determining whether a modification within the meaning of section 72(t)(4)(A) has occurred”, and therefore in itself will not trigger a loss of the penalty-exempt status of the SOSEPP.


What does happen then, in such a circumstance? Well, that’s when things go into the “it depends” category, followed closely by a whole lotta “no guidance from the IRS”.


If you have converted the entire balance of your IRA that is subject to the SOSEPP to a Roth IRA, you will be required to continue taking your series of payments from the new Roth IRA just the same as if they were still coming from the traditional IRA. If you don’t, you will most likely be subjected to recapture penalties on the earlier SOSEPP distributions, unless you’ve reached the end of the distribution requirement period – after five years or age 59½, whichever is later.


On the other hand, if you’ve only converted a portion of the traditional IRA to a Roth IRA, this is where it gets murky. The IRS has not provided definitive guidelines on exactly how you handle the SOSEPP from here… it is abundantly clear that you must continue your series of periodic payments until the end of the distribution period. What’s not clear is if you must continue taking the payments from the remainder of the traditional IRA, or from the Roth IRA, or proportionately from both accounts, or in any amounts you choose from either account, as long as the amount is proper to fit the bounds of your SOSEPP.


The best way to deal with this situation would be to convert the entire account if that’s feasible. If it’s just not feasible, then you should ask for a Private Letter Ruling from the IRS – especially if we’re talking about sizeable amounts (you be the judge). If the possible tax and penalty is relatively minor, I’d suggest taking proportionate amounts from the trad and Roth IRAs until the SOSEPP distribution requirement period ends. Make sure that you keep documentation on all of these transactions – you’ll need it if the IRS comes a-callin’.


Understand that the SOSEPP payment amount is not eligible to be converted to Roth. This is because 72t (SOSEPP) payments are not eligible for rollover. So in any given tax year while the SOSEPP is in effect, you must take the scheduled payment in cash, but then you may convert (or rollover) any additional amount that you like. Just make sure that you continue to take the SOSEPP scheduled payments each year while the SOSEPP is in effect and you should be golden.

							




				Posted on Mar 27th, 2023
				
by author: jblankenship. 


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Posted in: 72t, IRA, retirement plan, Roth conversion, tax.

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Principles of Pollex: Auto Purchases

			
			

				Mar 20th, 2023
				
by jblankenship. 

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new car
Photo credit: jb


(In case you are confused by the headline: a principle is a rule, and pollex is an obscure term for thumb. Therefore, this on-going series is all about financial Rules of Thumb.)


Buying a car is such a common activity that many folks don’t give much effort to following any “rules” around this purchase. I’ve often suggested a couple of rules that you may find useful or interesting…


The Decision to purchase a car in the first place


You need to be certain that your decision to purchase is based on a real need. Too often we get caught up in our desires and “keeping up with the Jones’s” when it comes to auto purchases. If your current car is providing you with service and isn’t beginning to fall apart, you should consider delaying a purchase until it actually makes sense for you.


The reason I say this is because a car is a depreciating asset – except in certain cases where you use your car to make money, such as in a delivery business, a car only costs you money – it doesn’t make money for you. And the cost of the car itself isn’t the only cost you’ll incur, you also need to consider additional insurance costs. If you buy a new car, you’ll need to carry full coverage for the replacement of a much more expensive item than your current, depreciated value, vehicle.


But here’s a rule of thumb that you might use to determine the overall cost of owning a vehicle: to get an idea of the total cost of ownership, including insurance, maintenance, and all, double the price and divide by 60. This is a rough guess of the cost, but you can probably do much better by going to a website like Edmunds.com and using their “Cost to Own” calculator.


Suggestions if you’re buying a new car


If you’ve chosen to purchase a new car, here are a few suggestions that will make your choice a better option for you in the long run:


Buy with cash. You should save up and purchase your auto with cash if you can do it. This way you are doing two things for yourself: 1) you’re able to negotiate specifically on the price of the new car and your trade-in’s value; and 2) you aren’t paying someone else for the use of the money.


There are exceptions to this rule, of course. The first is if you don’t have the cash available, which means one of two things, either you will need to delay the purchase or borrow the money to buy. Delaying is a good choice if your present auto still meets your needs (see my comment above regarding the decision to purchase a car in the first place).


Don’t finance for more than four years, preferably three years. In today’s world it’s possible to finance a car for 72 months, or six years, or longer. But if that’s the only way you can afford to make payments, you’re taking on more than you can really afford. This is because of the fact that a vehicle reduces in value dramatically over the first two or three years, and if you finance for much longer than three years, by the time you’ve reached the point where the car is starting to cost a lot of maintenance money (and therefore you’re thinking of trading for a newer model), it is worth much less than you still owe. This is known as being “upside-down” with regard to the financial value of the vehicle.


Put at least 20% down. This rule of thumb is helpful to ensure that you aren’t financing more than necessary. This will also help you to follow the four-year (or three-year) rule above, all the while keeping your payments lower. Just the same as in the “buy with cash” recommendation, if you can’t put at least 20% down in payment at the purchase, you should delay your purchase until you can do so.


Buy a used car


Another, possibly the best, rule of thumb with regard to auto purchases is to buy a used car, and drive it until it literally drops from exhaustion. It may not be glamorous (what sound financial advice is?) but this is one of those recommendations that has passed the test of time, and has been a part of some of the world’s greatest financial success stories.


According to Stanley and Danko’s seminal book “The Millionaire Next Door”, in the chapter called “You Aren’t What You Drive” – the average millionaire doesn’t put much value on having a brand-spanking new car. In fact, more than 37% of the millionaires that were surveyed purchased a used car most recently, and even if they bought it new, they held onto their car for a good while before trading:






Latest Model-Year

of Vehicle Owned		
Percent of

Millionaires		




Current Year
23.5%




Last Year/One Year Old
22.8%




Two Years Old
16.1%




Three Years Old
12.4%




Four Years Old
6.3%




Five Years Old
6.6%




Six Years Old or Older
12.3%






Those purchasing motor vehicles accounted for 81% of the sample of millionaires; those leasing accounted for 19%.

							




				Posted on Mar 20th, 2023
				
by author: jblankenship. 


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Posted in: financial planning, principles of pollex, rules of thumb.

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Should You Separate Your Rollovers From Your Contributory IRAs?

			
			

				Mar 13th, 2023
				
by jblankenship. 

				2 comments							

			
			

								
separate
Photo credit: jb


For the most part, it is recommended to merge all of your IRA money together into a single account, to simplify record-keeping, allocation, and paperwork in general. However, there may be circumstances where it could make very good sense to separate your contributory IRAs from 401(k) plan rollovers – and it pertains to creditor’s rights.


If you look at the article Creditor Protection for Retirement Plan Assets, you’ll see that IRAs in general have protection from creditors in the case of bankruptcy, up to $1 million. On the other hand, separated rollover assets from a 401(k) or other ERISA-protected account enjoy indefinite protection from creditors.


Rolling over the ERISA-protected funds into an account that contains contributory IRA funds (that is, an IRA that you have made deductible or non-deductible contributions to) automatically removes the ERISA protection and therefore the indefinite protection from creditors.


So it may make sense for folks who could be impacted by this protection (or rather the removal of the protection) to maintain separate accounts for rolled-over ERISA funds. This would be anyone whose total IRA account is (or may become) over $1 million – and regardless of whether or not you think bankruptcy is a possibility. In today’s sue-happy world, unusual circumstances could creep up on you at any moment and put you in the position where you might need this protection.


It’s very important to note that this protection only applies to actual bankruptcy – if you’re merely being sued by a creditor and you haven’t declared bankruptcy, your protection depends on federal non-bankruptcy law and state law. The article mentioned at the outset includes links to state law information with regard to these kinds of situations.

							




				Posted on Mar 13th, 2023
				
by author: jblankenship. 


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Posted in: IRA, retirement plan.

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More reasons to keep on rolling (to an IRA, that is)

			
			

				Mar 6th, 2023
				
by jblankenship. 

				3 comments							

			
			

								
rollover
Photo credit: jb


We have discussed in the past that it is usually better to rollover an old 401(k) plan from a former employer to an IRA – more flexibility in investments, (usually) lower costs, more control, etc., are among the chief reasons to do so.


However, in some cases your old 401(k) plan may have access to desirable investments that you couldn’t otherwise access, or possibly you have access to other benefits from participation, such as availability of a financial advisor. As long as the overall costs remain low in the plan, you might want to leave the funds there. Plus there are also some additional benefits inherent within 401(k) accounts that are not available to IRAs – you can read up on the reasons to leave your money in the 401(k) in the article Not So Fast! 9 Special Considerations Before Rolling Over Your 401(k).


On the flip side, there are certain things that you can’t do in a 401(k) (or other Qualified Retirement Plan) that you can ONLY do with an IRA while you’re under age 59½.


IRA-Only Options


With an IRA, there is no penalty for withdrawal for (click the link following each for more detail):


    

  • Health Insurance Premiums while unemployed – §72(t)(2)(D)
    • 

  • Qualified Higher Education Expenses – §72(t)(2)(E)
    • 

  • Qualified First-Time Homebuyer Expenses – §72(t)(2)(F)
    • 

  • Qualified Reservist Distributions – §72(t)(2)(G)
    • 



And none of those are available without penalty from your 401(k). Of course you would have to pay tax on the distribution, but otherwise you can take the money from your IRA for these purposes.


In addition, setting up a Series of Substantially Equal Periodic Payments (SOSEPP) is generally easier to qualify for and to set up from an IRA than from a 401(k), so this may be an additional reason to consider rolling over.

							




				Posted on Mar 6th, 2023
				
by author: jblankenship. 


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Posted in: 72t, Early Distribution, IRA, retirement plan.

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Tax Diversification for Investments

			
			

				Feb 20th, 2023
				
by jblankenship. 

				1 comment							

			
			

								
tax definition
Photo credit: jb


In past articles I have advocated the concept of spreading your tax-treatment out – so that you have money allocated in three major types of accounts: deferred tax (such as IRAs and 401(k) plans), tax-free (Roth IRAs), and capital gains taxable accounts. The reason behind this is that our fine government has this tendency to change the rules, and often. By spreading your tax treatment out you can help to ensure that funky new rules don’t throw off your entire retirement investing plan. In addition, having multiple modes of taxation can give you much flexibility in planning your income for tax purposes, once you get to the distribution phase of life.


The trick to all of this is to think about the timing of contributions to each kind of account… of course there are no hard and fast rules to determine what’s best for each kind of plan. Below is a discussion of some of the factors that you should consider as you balance out your tax treatment.


Early in life…


Early in your investing career it may makes a lot of sense to load as much of your savings into your 401(k) or other tax-deferred savings vehicle as possible, in order to maximize the benefit from tax savings up front. The biggest reason for this (beyond the tax savings) is so that you take advantage of your employer’s matching benefit, along with deferring taxes on your income as it increases over time.


If your tax bracket is really low though, you might want to utilize the Roth option in your 401(k) and maxing out your Roth IRA during this earliest, lowest-taxed time of life. A bit later when your tax bracket has increased somewhat, the tax reduction benefits of traditional 401(k) contributions and IRA contributions will be more valuable.


Later in your career when your income is higher, maximizing contributions to tax-deferred accounts will have a greater benefit to you from a tax savings standpoint. This is assuming that you expect for the taxes you’ll pay later during retirement will be lower due to your diversification of tax treatment.


As mentioned, as your income supports it you should begin making contributions to your Roth IRA as soon as possible.  This is partly due to the restrictions on income around investing in Roth IRAs – but mostly because you are paying tax at lower rates in your lower-earning days than you might later on in your career when your income increases.


And then on top of it all, when your income has grown to a point that you can maximize the other options (401(k) and Roth), you should begin investing in an account that is taxed by capital gains tax. This will give you the third leg of the tax-diversification stool. Since capital gains are presently taxed at a much lower rate than ordinary income – which is what your IRA or 401(k) distributions are taxed at – it makes a great deal of sense to have some of your money invested in these accounts as well.


Later in life…


Later on in your life, as you come near to that point where you will have to begin taking Required Minimum Distributions (RMDs) from your IRA and 401(k) accounts, it might make sense to take significant portions of those accounts and either convert them to Roth accounts or capital gains taxed accounts. The preference would be to place the funds distributed into a Roth IRA as a conversion, especially if you are in a position where you will not need access to the funds for some time and therefore can benefit from tax-free growth of the account. You may also want to balance those conversions to Roth with some non-tax-deferred investments as well – because you never know what may happen with the tax code. Either way, Roth conversion or distribution and re-investment in a taxable account, you’ll pay income tax when you withdraw the funds from your tax-deferral account such as a 401(k) or traditional IRA.


It’s (very!) possible, given the government’s need to increase tax revenues to pay for things like COVID giveaways, that there could be changes in the works for how tax-deferred plans are taxed. Just a few options that have been put forth in recent memory include:


    

  • extra taxes on IRA assets (this was in place back in the mid-80’s)
    • 

  • changes to the minimum distribution rules to require faster distribution or to eliminate “stretch” capabilities (this happened with the SECURE Act)
    • 

  • adding investment restrictions, such as requiring a portion of IRAs to be invested in “socially responsible” investments (not as likely but you just never know)
    • 

  • nationalization of retirement accounts – e.g., governmental takeover of all IRA and 401(k) plans in exchange for a superannuization plan like some socialized countries use (also somewhat unlikely but again, there’s always a however in life)
    • 



Yet another option, especially if you have very few assets outside your IRAs and 401(k) plans, you can reduce your taxable estate (when normal folks have an estate tax again, that is) by taking extra distributions from your IRA or 401(k) and making gifts to your children and grandchildren. You could place the assets in a trust that represents a completed gift, or give the money directly to your future heirs – this way you are able to see your children and grandchildren enjoying the fruits of your labors while you’re still living.

							




				Posted on Feb 20th, 2023
				
by author: jblankenship. 


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Posted in: financial planning, investing, IRA, retirement plan, Roth conversion, tax.

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Family Maximum Benefit (Disability)

			
			

				Feb 13th, 2023
				
by jblankenship. 

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maximum?
Photo credit: jb


In a previous article we talked about the Social Security Family Maximum Benefit for a retired worker – and we mentioned that there was a separate calculation for the Social Security Family Maximum Benefit for a disabled worker.


This calculation is much simpler than the retired worker calculation for Family Maximum Benefits. Nonetheless, hang on to your hat, keep your arms and legs inside the car at all times, cuz this may still get a little outtahand:


The family maximum for the spouse and children of a disabled worker is 85% of the worker’s Average Indexed Monthly Earnings (AIME), but the family maximum cannot be less than the worker’s Primary Insurance Amount (PIA) nor more than 150% of the PIA.


If you’ll recall, the FMB for a retirement benefit is solely based on the PIA. This allows for an adjustment upward in some cases if the AIME is smaller, at the lower end of the spectrum. The crossover point from the PIA floor occurs (for 2023) on a AIME between $1,200 and $1,300, and the crossover from 85% of AIME to 150% of PIA occurs between $2,600 and $2,700.


Example


Let’s use an example AIME amount:  $4,400.00. For this worker reaching age 62 in 2023, the PIA would be $2,054.70.


So, the maximum family benefit for the disabled worker’s family would be equal to the lesser of 85% of the AIME or 150% of the PIA, but in no case not less than the PIA.


85% of the AIME:  85% times $4,400.00 = $3,740.00

150% of the PIA:  150% times $2,054.70 = $3,082.05


The maximum family benefit is the lesser of those two factors, or $3,082.05 – rounded up to the nearest dime as $3,082.10.

							




				Posted on Feb 13th, 2023
				
by author: jblankenship. 


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Posted in: Social Security.

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Your Appeal Rights at the IRS

			
			

				Jan 16th, 2023
				
by jblankenship. 

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appeal
Photo credit: jb


If you have received a result from an IRS examination that requires an adjustment to your tax liability and you don’t agree with the result, you have certain rights to appeal – your opportunity to state your case and perhaps get an overturn of the result of your examination. (It’s always possible!)


Facts About Your Appeal Rights


The IRS has put together a list of seven facts that they want you to be aware of with regard to your appeal rights (for more information see Tax Tip 2022.82):


    

  1. When the IRS makes an adjustment to your tax return, you will receive a report or letter explaining the proposed adjustments. This letter will also explain how to request a conference with an Appeals Office should you not agree with the IRS finding on your tax return.
    2. 

  2. In addition to tax return examinations, many other tax obligations can be appealed. You may also appeal penalties, interest, trust fund recovery penalties, offers in compromise, liens, and levies.
    3. 

  3. You are urged to be prepared with appropriate records and documentation to support your position if you request a conference with an IRS Appeals employee.
    4. 

  4. Appeals conferences are informal meetings. You may represent yourself or have someone else represent you (such as an Enrolled Agent, an attorney, or a CPA).
    5. 

  5. The IRS Appeals Office is separate from – and independent of – the IRS office taking the action you may disagree with. The Appeals Office is the only level of administrative appeal within the agency.
    6. 

  6. If you do not reach agreement with IRS Appeals or if you do not wish to appeal within the IRS, you may appeal certain actions through the courts.
    7. 

  7. For further information on the appeals process, refer to IRS Publication 5, Your Appeal Rights and How to Prepare a Protest If You Disagree.
    8. 



Additional Publications


In addition to Publication 5, there are several other IRS Publications that may help you in your appeal process. For example, Publication 556, Examination of Returns, Appeal Rights and Claims for Refund. You can also refer to Publication 1660 (PDF), Collection Appeal Rights, which discusses how you can appeal collection actions and Publication 3605, Fast Track Mediation–A Process for Prompt Resolution of Tax Issues. There is also Publication 1, Your Rights as a Taxpayer.

							




				Posted on Jan 16th, 2023
				
by author: jblankenship. 


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Posted in: income tax, irs, tax.

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When Your Birthday Isn’t Your Birthday

			
			

				Jan 9th, 2023
				
by jblankenship. 

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birthday
Photo credit: jb


(According to the Social Security Administration)


There are a couple of circumstances where the Social Security Administration changes your birthdate for you. Chances are if this applies to you, you already know this, but I thought I’d explain it anyhow just so you’ll know what it’s all about.


First of the Month


If your date of birth is on the first day of the month, then for Social Security purposes, your Birth Month is actually the month prior to your actual date of birth. So if you were born on July 1, according to the Social Security Administration, your Birth Month, and therefore the month that your benefit is based upon (for example, Full Retirement Age), is June. In this example, your Birth Year remains the same, but that’s not always the case…


First of January


In the case of a date of birth being January 1, your Birth Month is December, and your Birth Year is the year prior to your actual birth.


Twenty-ninth of February


If you are one of the lucky ones that happen to have been born on Leap Day, February 29 – you’re in luck! The Social Security Administration doesn’t really care what day of the month you were born, only the month and year. So even though your actual date of birth anniversary doesn’t come every year, the month does, and the Social Security Administration counts February as your Birth Month in your case.

							




				Posted on Jan 9th, 2023
				
by author: jblankenship. 


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Posted in: Social Security.

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Social Security: Average Indexed Monthly Earnings (AIME) Explanation

			
			

				Dec 19th, 2022
				
by jblankenship. 

				5 comments							

			
			

								
an omelet in Denver
Photo credit: jb


One of the key components that the Social Security Administration uses to calculate your Social Security retirement benefit is called the Average Indexed Monthly Earnings, or AIME (don’t you just love the acronym-loving Social Security Administration?  Errr… SSA.). The AIME is calculated by taking the highest-earning (by index) 35 years of your working life while covered by Social Security, and then computing an average monthly amount based upon those indexed amounts.


Gobbledy-gook, right? Okay, here’s another way to explain it: as you work in a Social Security insured job, your earnings are recorded each year. Each year the SSA applies a multiplier to the year’s wages, based upon an index called the Average Wage Index. Each person’s index is based on the year they reach age 62. The indexes for each year of your earnings is adjusted, reflecting the change from when your earnings were recorded by comparison to the year you reach age 62.


Once you are eligible for retirement (age 62, your Earliest Eligibility Age, or EEA), these years of earnings are put into a table and the indexes applied. Listed below is an example of an earnings table with indexes applied (keep in mind this is an example for a specific age – your own indexes will likely be different):


Average Indexed Monthly Earnings






Age
Earnings
Index
Indexed Earnings




22
$ 5,000.00
7.4186559
$37,093.28




23
$ 5,589.41
7.0133446
$39,200.47




24
$ 5,771.91
6.6817598
$38,566.51




25
$ 5,951.90
6.362084
$37,866.51




26
$ 6,259.69
5.794243
$36,270.16




27
$ 6,598.18
5.453047
$35,980.19




28
$ 6,724.29
5.147081
$34,610.48




29
$ 7,263.44
4.789173
$34,785.89




30
$ 7,652.52
4.480037
$34,283.57




31
$ 8,151.79
4.226722
$34,455.35




32
$ 8,771.10
3.915769
$34,345.61




33
$ 9,095.79
3.600777
$32,751.90




34
$ 9,809.52
3.303241
$32,403.21




35
$10,300.66
3.001138
$30,913.71




36
$11,796.26
2.84454
$33,554.93




37
$12,072.71
2.712404
$32,746.07




38
$13,417.50
2.561809
$34,373.08




39
$15,014.39
2.457123
$36,892.20




40
$16,488.37
2.386295
$39,346.11




41
$17,578.53
2.243234
$39,432.76




42
$19,816.33
2.137938
$42,366.08




43
$20,064.41
2.056512
$41,262.70




44
$22,795.36
1.965713
$44,809.12




45
$25,440.98
1.895091
$48,212.98




46
$26,801.49
1.802233
$48,302.53




47
$27,536.23
1.786866
$49,203.55




48
$30,992.15
1.740161
$53,931.33




49
$34,893.01
1.673097
$58,379.40




50
$36,396.83
1.595089
$58,056.18




51
$36,936.43
1.507145
$55,668.58




52
$41,035.24
1.432187
$58,770.12




53
$42,533.74
1.356586
$57,700.69




54
$45,383.43
1.285498
$58,340.33




55
$50,034.62
1.255546
$62,820.74




56
$51,454.51
1.243079
$63,962.02




57
$55,140.29
1.213416
$66,908.14




58
$61,014.02
1.159513
$70,746.57




59
$64,329.16
1.118584
$71,957.57




60
$67,170.90
1.06943
$71,834.56




61
$73,383.51
1.023004
$75,071.63




62
$82,983.83
1
$82,983.83




Average of top 35 years


$49,898.35




Monthly Average


$4,158.20






This table shows that your wages earned in each year you were working have been indexed to compare with the Average Wage Index for your age 62 year. Then the top 35 indexed earnings years are totaled and divided by 420 to come up with the Average Indexed Monthly Earnings – your very own AIME. The reason they’re divided by 420 is that this is the number of months in 35 years. The AIME is generally always produced by dividing the top 35 years by 420, even if there are fewer than 35 years in the table (such as if you had years without earnings).


With this table in mind, you can see how the AIME can increase if you continue working past age 62 – of course those earnings will be added to the table (but not indexed after age 62), and assuming that this knocks out one of your lower earning years, the average would increase.


And, as you might guess, this AIME isn’t the amount of retirement benefit that you can expect: more factors need to be applied to come up with your PIA, and then your actual retirement age is applied to that, to come up with your benefit amount.

							




				Posted on Dec 19th, 2022
				
by author: jblankenship. 


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Posted in: primary insurance amount, Social Security.

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IRA Investment Planning for Taxation

			
			

				Dec 12th, 2022
				
by jblankenship. 

				2 comments							

			
			

								
tax tail investment dog
Photo credit: diedoe


The question often comes up – what types of investments are best for my IRA?


Of course, any investment that you make in a tax-deferred fashion is a good one, at least in theory. But there are some investments that make the most sense for your IRA versus other vehicles… and some investments that make more sense in other kinds of investment accounts, where possible.


Listed below are a couple of considerations to take into account when considering taxation of your IRA and non-IRA investments.


Bonds and other interest-bearing vehicles


Given the nature of the IRA – deferring taxation on current income and growth, investments that would otherwise be taxed at ordinary income tax rates would be best for your IRA.


This includes the likes of interest-bearing investments, such as CDs or bonds. Since, presumably, your tax rate when you begin taking distributions will be either the same or less than your rate before retirement, the deferral will provide for the interest to be taxed at either the same rate or lower, just later in your life.


Growth-oriented and dividend-paying investments


Growth-oriented stocks and investments that pay current dividends make more sense to be held in taxable accounts than in deferred accounts. This is due to the fact that dividends and capital gains are (at least for now) taxed at much lower rates than ordinary income – which is the rate your distributions from the IRA will be taxed at.


Under today’s rules, most folks won’t pay more than 15% tax on dividends and capital gains, and many will pay 0% tax. But if these dividends and capital gains are from investments within an IRA, everything will be taxed at ordinary income tax rates, which can be as high as 37%.


The same would be true of other growth- and dividend-oriented investments such as real estate and commodities, for example.


Bottom Line


So in other words, if you have the ability, you should split your interest earning investments into your IRA, and growth- and dividend-oriented investments into taxable accounts. This way, you won’t be subjecting lower-taxed items to a higher tax rate – if possible.


This doesn’t mean that you should ONLY invest in items that would be taxed at ordinary rates within your IRA. This is known as letting the tax-tail wag the investment dog. Tax planning should always be considered as you plan your investments, but appropriate diversification should always be your first consideration. It may be easiest for you to diversify within each type of account, but for tax efficiency you might want to diversify among all of your accounts as a single item.


In addition, the deductibility of IRA (and 401(k)) contributions provides a benefit that should be weighed against the taxation concepts we’ve talked about above as well. Again, the tax-tail shouldn’t wag the investment dog…

							




				Posted on Dec 12th, 2022
				
by author: jblankenship. 


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Posted in: investing, IRA, retirement plan, tax.

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A Cash Flow Dilemma – Should I take distributions from my IRA or from my taxable account?

			
			

				Dec 5th, 2022
				
by jblankenship. 

				6 comments							

			
			

								
dilemma
Photo credit – diedoe


I know, long title… but I wanted to fully describe the content of this article, which is to answer the following dilemma: I have a sizable IRA and a sizable taxable account that holds appreciated stocks. I am in need of additional funds (above any RMD required from the IRA) – so which account should I draw the additional funds from?


Taxable account!


There is one school of thought that says you should take the additional funds from the taxable account, because at today’s capital gains rates you will save a bundle in taxes.


The capital gains on your appreciated stock will at most be taxed at 20% under present law. But quite likely your rate will be less at 15%, and could possibly even be zero. When you compare this tax rate to the ordinary income tax rates, which top out at 37% for 2023 (same as last year), this is a bargain. This also assumes that you’ve held the stock for at least 12 months, otherwise your gains would be taxed at your marginal ordinary income tax rate.


It’s a no-brainer, you should always take this extra money from the taxable account, right? No, not always…


IRA account!


There is another school of thought that says, since appreciated stock receives a step-up in basis at your death, you should leave those funds alone if you can and plan to leave them to your heirs. This way the appreciated portion is never taxed.


So when you consider the concept of paying ordinary tax on your IRA distribution and zero tax on the taxable account (assuming you never need to use those funds) versus paying capital gains on the taxable account and potentially leaving your heirs with a fully-taxable IRA (because IRA funds never receive a step-up in basis), this method seems to make a lot of sense.


Conclusion


In the circumstance where you know you’re going to need most or all of the funds from both accounts, it probably doesn’t make much difference in the long run. But you would likely come out better, at least in the short run, using the taxable funds at today’s low capital gains rates first. This will hold true until changes are made the the capital gains tax rates that might make this method less desirable.


But if your holdings are large enough in either account to cover your needs for the longer term, with some planning of your distributions you might come out better with the second method. Or rather, your heirs will come out better in the long run, since the step-up rule is unlikely to change anytime soon. (Now watch Congress make a change to the step-up rule!)


You could also vary your strategy and use IRA funds in one year, and capital gains accounts in another year, “stacking” the ordinary income versus the capital gains income. You might even use the difference (in the capital gains year) to convert some of your IRA money to Roth.

							




				Posted on Dec 5th, 2022
				
by author: jblankenship. 


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Posted in: IRA, retirement plan, tax.

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Know Thyself

			
			

				Oct 31st, 2022
				
by jblankenship. 

				2 comments							

			
			

								
h dumpty
Photo credit: coop


This ancient two-word phrase, attributed to several Greek luminaries ranging from Socrates to Pythagoras, implores the reader toward introspection. This introspection can be especially helpful when considering how we feel about our financial future – particularly when we are at extremes of emotion.


The recent stock market activity has given us plenty of opportunities to experience extremes of emotion… but then again, you can pretty much choose any time period and make a similar statement. There are quite a few studies that have recently brought to the forefront several things that we need to understand about ourselves and how emotion could impact our decision-making process.


Loss Aversion – as investors in general, we feel the impact of a loss approximately twice as much as we experience the good feelings from a gain. It has further been estimated that as we approach retirement, this ratio increases to a factor of five times more pain for a loss as opposed to the joy we experience for a gain.


This seems to be true no matter whether the loss is realized or simply on paper. The problem is that, in stock market investing, short term losses and gains are simply normal market activity, and we need to temper our emotions to keep things in perspective.


We Want Control… or Do We? – it would seem to follow the train of thought that, if we are feeling pain in our investing activities we’d appreciate some guarantees and protection of some sort in our choices of products. However, guarantees come with a cost – that of giving up control. And as investors we prefer control (or the perception of control) over guarantees, studies have shown.


On the other hand, other studies tell us that a guaranteed income from an investment is preferred over an assured return on investment over time. These studies show that, given a choice between an annuity with a monthly income and an investment portfolio structured to provide the same sort of returns over time, if we’re near retirement we choose the annuity seven times out of ten.


This seems to imply that we value the concept of income, that of receiving a check every month, over the excess costs and lack of control that an annuity represents. At the same time, we prefer to feel like we’re in control of our investing activities, which is counter to the argument in favor of an annuity.


Lack of Understanding of the Numbers – when presented with the outcome of financial calculators, many of us consider whatever calculations were done in the background to be tantamount to magic. For example, the very concept of inflation and its impact on our future finances is a mystery to us – we work best when calculations are discounted to present values.


Even though it’s been decided that it was politically incorrect, one popular baby-boomer who is now age 63 once admitted that math is tough (Barbie, of the doll fame, who actually admitted that “Math class is tough”). There’s no shame in admitting that factor – for a lot of us, math can be very tough. And as we get older (some say by around age 53) our understanding of mathematical calculations begins to decline dramatically, making math even tougher.


This can lead to distrust of the very calculations that could help you make good decisions in your financial life.


So What Does All Of This Mean?


Mostly this just means that we’re carrying with us a lot of preconceived notions and emotional preferences that we must take into account as we make financial decisions. “Know Thyself” means that we should understand how these various notions can paint our perceptions of situations, and if we understand these things, we can recognize when our own limitations are working against us and take actions to consider things in a new, less biased, light.


For example, it’s natural to feel the pain of losses. But as explained in the article The Lost Decade and What It Means, (yes, it’s an oldy, but a goody) the activity of investing, especially in the stock markets, is a long-term activity and short-term losses, even over a few years, are temporary in the scheme of things. Keep this in mind before making any rash investment decisions – you’re likely to regret emotion-driven decisions.

							




				Posted on Oct 31st, 2022
				
by author: jblankenship. 


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Posted in: financial planning, investing.

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When a 60-day Rollover is Not a 60-day Rollover

			
			

				Oct 10th, 2022
				
by jblankenship. 

				1 comment							

			
			

								
requirement
Photo credit: jb


A Private Letter Ruling (PLR) from 2010 presents an interesting outcome from an indirect rollover – a rollover that was not done in a trustee-to-trustee transfer.


This particular PLR, 201005057, deals with a situation where the taxpayer received a check from her former employer plan, however the check was made out to her new employer, for her benefit.


When the taxpayer failed to deliver the check to the new plan within 60 days, the rollover became questionable – since indirect (non-trustee-to-trustee transfers) are generally limited to be completed within 60 days.  (She did deposit it, just a little later than 60 days.)


When the taxpayer received a 1099R from the former employer plan, it was coded with distribution code “G”, which indicates a direct rollover.  Therefore the intent for a direct rollover was clear.


The IRS ruled in favor of the taxpayer, since the check was made out to the new plan, and therefore not in the control of the taxpayer.  In other words, the taxpayer could not have used the funds for any other purpose than to deposit into the new plan.   The check made out to the new custodian effectively acted as a direct rollover into the new plan, in the eyes of the IRS, and as such it was not subject to the 60-day limit.


It appears from this PLR that a taxpayer receiving such a distribution can delay depositing the check after the 60-day limit, since such a distribution is considered to be a direct rollover.  I don’t know of any practical reason you would want to do this, but if circumstances brought about such a situation, it’s good news.


Keep in mind that PLRs cannot be used to substantiate a position or cite as a precedent (pursuant to 26 USC § 6110(k)(3)), but can be used as guidance for determining if a matter is worthy of pursuing via your own private letter ruling.

							




				Posted on Oct 10th, 2022
				
by author: jblankenship. 


				1 comment already - add to the conversation!			


			
Posted in: employer plan, IRA, irs, plr, private letter ruling, qualified retirement plan, retirement plan.

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