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

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Minima Cackling Goose (Photo credit: K Schneider)

I receive quite a few questions from folks looking for clarification on the rules around Required Minimum Distributions upon reaching age 70½, so I thought I’d jot down a couple of facts about them that you may find interesting.

When can I take the distribution?

Looking through some notes from readers I found one where it was asked (this is paraphrased for clarity):

My birthdate is April 10, 1943, so I will reach age 70½ on October 10, 2013. Do I need to wait until October 10 or after to take a distribution so that it is counted as my RMD?

I responded to this question by saying that, to be safe, I suggest the reader wait until after October 10 to take the distribution.

However. (there’s always a however in life, isn’t there?)

I subsequently received a message from a reader (thanks, TAM!) with the following updated information:

It is, in practice, fully believed that the IRS looks at the YEAR you turn 70 1/2 and NOT the birthdate. When reviewing IRS.gov they are very concerned about making sure one gets the RMD by the last date possible and do not really address how soon a person can take it. Such is government! But in practice, if your birthday makes the date you turn 70 1/2 turn out to be 12/31 or 12/30 we generally advise the client to take the RMD during that year to avoid having to take two RMD’s the next year.

I thought TAM’s information might be helpful to folks who are facing this decision. It still won’t hurt to wait, but according to TAM, you could take the distribution any time during that year when you reach age 70½.

How does IRS know I’ve taken the distribution?

This question comes up pretty often as well:

Do I need to send in a form or something to let the IRS know that I’ve taken my required minimum distribution?

When you’re subject to RMD during a particular year (including the year you reach age 70½), the first money that you withdraw from your IRA(s) is considered to be your RMD. As long as you take at least enough distribution from the account to satisfy the RMD requirement, you’re golden.

Your IRA custodian sends a copy of your 1099-R form to the IRS, as well as filing a Form 5498 (to indicate contributions) – so the IRS is well aware that you’ve taken the distribution. They’re also well aware if you do not take distributions, and will be in contact with you to rectify the situation – in the form of a bill for the penalties and taxes. Don’t rely on this as your notification!

Posted on Jul 1st, 2013

by author: jblankenship.

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

Medicare Part B

Jun 28th, 2013

by sraskie.

4 comments

English: image edited to hide card’s owner name. author: Arturo Portilla (Photo credit: Wikipedia)

The next letter in our Medicare alphabet soup is Part B. Part B is essentially medical insurance that covers doctor’s services, outpatient care, home health services, and durable medical equipment. It will also cover some other services as well as well as many preventative services.

As far as what doctors will and will not cover Part B depends on whether or not they have agreed to assignment. Assignment is simply your doctor or another health care provider agreeing to be paid directly by Medicare and be willing to accept the payment amount that Medicare decides is the value of the service. Agreement also means the doctor or health care provider cannot charge you any more than what the deductible and coinsurance amounts are.

The basic cost for Medicare Part B for 2013 is $104.90 monthly. Individuals with higher AGI may end up paying more. The table below, courtesy of Medicare.gov shows the increased amount based on AGI.

If your yearly income in 2011 was		You pay (in 2013)
File individual tax return	File joint tax return	You pay (in 2013)
$85,000 or less	$170,000 or less	$104.90
above $85,000 up to $107,000	above $170,000 up to $214,000	$146.90
above $107,000 up to $160,000	above $214,000 up to $320,000	$209.80
above $160,000 up to $214,000	above $320,000 up to $428,000	$272.70
above $214,000	above $428,000	$335.70

The standard deductible for Medicare Part B is $147 for 2103. Once the deductible is met, then any covered individual will pay 20% of any covered service. Medicare will pick up the other 80%. This is all that someone will pay out of pocket for services under a doctor or provider who has an agreement with Medicare. A person may end up paying more if their doctor is not in agreement.

Part B does not cover long term care nor does it cover custodial care. Other excluded services include routine dental and eye care, acupuncture, hearing aids and exams, and elective cosmetic surgery.

To enroll in Part B, you can ether choose to enroll or you may have been automatically enrolled. If you’re already receiving Social Security benefits then you’re automatically enrolled in Part A and B unless you decide to opt out of Part B. Possible reasons you may want to delay Part B coverage would be in the case of if you already have benefits through current employment or a union agreement.

Generally, should you choose to enroll in Part B, you’re allowed to do during the open enrollment periods. Usually you have 8 months to sign up for Part B coverage. Failure to sign up within the 8 month window may lead to you paying a penalty to sign up outside of the enrollment period.

Signing up for Part B also allows you and qualifies you to become eligible for a one-time 6 month open enrollment period for getting a Medigap policy. What does this mean? This means that you now have a guaranteed right to purchase a Medigap policy in your state regardless of your health status. We’ll talk about Medigap in a future article.

Posted on Jun 28th, 2013

by author: sraskie.

4 comments already - add to the conversation!

Posted in: 2013 tax year, baby boomers, health insurance, Insurance, Medicare, medicare, medicare costs, medicare part b, medicare part b premiums.
Tagged: medicare · medicare part b · part b

Book Review: Control Your Retirement Destiny

Jun 24th, 2013

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This new book is the first book from my colleague Dana Anspach. Dana has been writing and blogging for quite some time now, primarily as the voice behind Money Over 55 for About.com (www.moneyover55.about.com). Dana also is a practicing financial advisor and respected speaker.

If you’re looking for a nuts-and-bolts, do-it-yourself primer on all things related to retirement, this is your book. Ms. Anspach has put together a very complete overview of all of the areas that you need to consider in order to “Control Your Retirement Destiny”. By following the advice in this book, you can figure out how much money you need to have to retire, where to put it (meaning, what types of accounts to use), how to invest it, and all of the other important topics that you need to know about.

Along the way, you’ll learn what’s important to know about Social Security, taxes, investment placement, annuities, and mortgages, among other things. Dana intersperses her experiences in helping others through these topics, and provides excellent examples to illustrate the topics.

In addition to providing advice, within the book Ms. Anspach provides some excellent worksheets that you can use to map out your own retirement – factoring in the money you’ll need at various points on your journey, pinpointing when you’ll need specific amounts. As you build your worksheets you’ll refine the scenarios, helping you to determine how to generate your retirement income stream in the most efficient and effective manner.

The spreadsheets are pre-filled throughout with an example couple, in order to illustrate how the process has worked for them. You’ll follow this example throughout all of the decision-points, including when to file for Social Security, how to maintain tax efficiency, and planning retirement income and insurance as you plan your retirement.

In addition to all of the advice given throughout, additional resources are provided to aid your efforts, including recommendations for working with an advisor to help you with the process.

I will recommend this book to anyone who is just starting on the process of mapping out retirement. This is particularly so for the person who really wants to have a hands-on approach as they plan retirement – but I think the book will also be helpful for the person or couple who just wants to have a better understanding of the important decisions surrounding retirement.

Posted on Jun 24th, 2013

by author: jblankenship.

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Posted in: Book review, retirement plan, retirement savings plans, Social Security.
Tagged: book review · retirement plan · Social Security

The Real Breakeven Point for Delaying Your Own Social Security Benefit and Taking the Spousal Benefit

Jun 21st, 2013

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Balanza de la Justicia (Photo credit: Wikipedia)

Recently there was an article that I was involved with where we were reviewing the strategies of taking a restricted spousal benefit and therefore delaying your own benefit versus taking your own benefit. An astute reader (Thanks BL!) pointed out that there was a bit of a flaw in the logic on the costs of delaying, and therefore a significant difference in the breakeven period.

Briefly, the example went as follows:

Say the wife, Michelle, has a PIA of $1,300 and Mike has a PIA of $2,500. They’re both age 66, and Michelle files the restricted app and is eligible to receive $1,250 (half of Mike’s), which is only $50 less than she would receive if she filed for her own benefit. After four years of delay, she has given up $2,400 ($50 times 48 months) but now her benefit is $1,716 – $416 more than she would have received at age 66. At that rate, she makes up the foregone $2,400 in less than six months.

Here’s the problem:

The example assumes that there is a one-time choice to be made between taking the spousal benefit and taking Michelle’s own benefit. In reality, this choice is made every single month after that first month. Michelle is choosing to continue receiving the spousal benefit versus her own benefit. Her potential foregone benefit increases with each passing month! So in other words, the $2,400 that I estimated above was actually very much understated.

After the first month has passed, if Michelle makes the choice to stay with the spousal benefit, the amount of increased benefit that has been foregone is now increased to $58.70 for the current month. This is because the Delayed Retirement Credit (DRC) is 2/3% per month of delay past her Full Retirement Age. So, since Michelle is making the choice every month to continue receiving the spousal benefit, the amount of her own foregone benefit increases every month between FRA and age 70.

For the example at hand, if you consider the increase every month, Michelle is actually foregoing a total of $12,176. This is, as noted, a significant difference from the figure of $2,400 that I used in the original article. The recommendation is the same though, as it still makes sense for Michelle to delay her own benefit until age 70 and receive the spousal benefit during that four years.

The amount of Michelle’s own benefit that she has foregone during this four year period, $12,176, will be made up by her increased retirement benefit that she can receive upon reaching age 70. At this stage (not including Cost of Living Adjustments) she will be eligible to receive $1,716, which is an increase of $466 per month. With this additional benefit amount, Michelle’s breakeven point against the foregone $12,176 is a little less than 30 months, or 2½ years.

Understand that this outcome is specific to the example that I outlined above. The amount of your own benefit and the amount of the spousal benefit will change the outcome and breakeven point for your own circumstances. The other point that is not worked out with this example is the overall couple’s benefit – which is important to work out as well. If Michelle chose to use her own benefit at FRA, Mike could file a restricted application at that point. This would result in a less-optimal outcome, but these projections should be done as well in working out your plan for Social Security benefits.

I hope the original article didn’t cause too much confusion – this should set the record straight.

Posted on Jun 21st, 2013

by author: jblankenship.

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Posted in: Delayed Retirement Credit, Social Security, social security benefits, Social Security spousal benefit.
Tagged: delayed retirement credit · DRC · Social Security · spousal benefit

Don’t Just Walk by That Dime on the Ground!

Jun 19th, 2013

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The Government Dime (Photo credit: scismgenie)

Have you ever been walking along the street and saw a dime on the ground? Did you just walk right by, or did you stop to pick it up? Heck, it’s only a dime, it’s not hardly worth the effort to bend over, right? But what if it was a dollar? Or a hundred dollars? You wouldn’t just walk by that, would you? What about $1,200?

Unfortunately, many folks do this very thing with their 401(k) plan employer matching funds. Most employers that sponsor 401(k) plans provide a matching contribution when you defer money into the plan. Often this is expressed as a certain percentage of your own contribution, such as 50% of your first 6% of contributions to the plan.

So if you make $40,000 a year and you contribute 6% to the 401(k) plan, that means you’ll be contributing $2,400 to the plan from your own funds, pre-tax. Since your employer contributes 50% of your first 6%, you’ll have an additional $1,200 added to the account for the year.

If you can only afford to contribute 2% (or $800) to the plan, you’re still getting an additional 50% of your contribution added by your employer for a total of $1,200 for the year. It still makes sense to participate even if you can’t maximize the employer contributions.

However, if you choose not to participate at all, you are giving up the extra money from your employer – forever. You can’t go back and get this money later when you think you can afford to. You’re essentially walking by that $1,200 that’s just sitting there on the ground waiting for you to pick it up.

Arguments against

After having this conversation with several folks, I’ve heard many different excuses to not take advantage of a 401(k) plan. The excuses usually fall into a few limited camps, which I have listed a below.

It’s my money! You’re darn right it is! And if you don’t participate in your 401(k) plan you’re throwing some of *your* money away. Many times people believe that when they put money into a 401(k) plan, it’s gone for good. Nothing could be more untrue! The 401(k) plan is your property. All of your contributions and (as long as you’re vested in the plan) the employer contributions are yours to keep. Granted, it’s locked up behind some significant fees and penalties until you reach retirement age (59½ in most cases) – but it’s still yours.

I don’t trust my company – they’ll go bankrupt and lose my money! As noted above, the 401(k) account is yours, not the company’s. Even if the company goes bankrupt completely, as long as you haven’t invested your entire 401(k) plan in company stock (a la Enron), you still have your 401(k) plan intact. They can’t lose your money, in other words! It’s not theirs to lose.

I can’t afford to put money in the plan! These days, money can be pretty tight (but when isn’t it?). Unfortunately, regardless of how much money you make, it’s always possible to spend up to and more than what you bring home each payday. The reverse of this is also true. Within limits, it’s usually possible to make do with less. If your paycheck was a dollar less every payday you’d figure out how to get by, right? How about $78 less?

Using our example from above, for a single person with an annual income of $40,000 per year, before you participate in the 401(k) plan, your total income tax would be approximately $4,054. If you chose to put 6% or $2,400 in your company 401(k) plan, your income tax would work out to $3,694 – $360 less. So your take home pay would only reduce by about $78 per paycheck (if you’re paid every other week). In return for this annual reduction of $2,040 in take-home pay, you’d now have a 401(k) account with $3,600 in it when counting the employer contributions.

Pretty sweet deal, if you asked me (but you didn’t, I just threw this in your face!). For a total “cost” of $78 per paycheck, you get lower taxes PLUS a retirement savings account worth 75% more than what you had to give up. Not too shabby.

One great benefit of participating in a 401(k) plan is that once you’ve made the decision to participate, you are deferring this income before it makes it into your hands. You don’t have to (or get to) make a decision about saving, it’s done automatically. This helps you to get past one of the real difficulties that many folks face with saving: the money always seems to find another place. This way it automatically goes into savings, before it can find another place.

The bottom line

The best and most important way to assure success in retirement savings is to put away more money over time. Of course your investment returns will help, but if you don’t save the money, it can’t produce returns, right? So do yourself a favor and don’t walk past that $1,200 that’s just lying on the ground!

Posted on Jun 19th, 2013

by author: jblankenship.

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

3 things you can do if you’ve filed for Social Security benefits too early

Jun 14th, 2013

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It’s too early for the beach (Photo credit: c@rljones)

I often hear from people who, for whatever reason, decided to file for their Social Security retirement benefit immediately upon reaching 62 (or 66, or whatever age), and now they have found out that this wasn’t necessarily the best option for them to maximize their lifetime Social Security benefits.

There are several things that you can do about this – three that come to mind at the moment. Below we’ll work through each of these ways to fix a situation where you filed too soon.

Pay it back

If it’s been less than 12 months since you filed, it’s possible for you to withdraw your application for benefits and pay back all that you’ve received to date. Once you’ve done this, as far as Social Security is concerned, you never filed. All of your benefit options are intact, just as if you hadn’t filed in the first place.

If your spouse or other beneficiaries began receiving benefits based on your record when you filed for your own benefit, those benefits will cease, and all benefits that your spouse or beneficiaries have received to date will also have to be paid back.

This can be quite costly to do, but the increased future benefits are likely worth the cost.

Work it off

If it’s been more than 12 months since you filed or if the cost to pay it all back is just too much to stomach, there’s another way to sort of re-set your options. This method isn’t as good as the payback option, but it’s the next best available to fix your problem if you are still working (or can get a job) and you’re younger than Full Retirement Age (FRA).

Here’s how it works: if you are under FRA and working while receiving Social Security benefits, for each two dollars above a certain limit ($15,120 in 2013 and adjusted each year) one dollar of benefits will be withheld. For example, if you are receiving $12,000 per year in Social Security benefits and you get a job that pays you $25,000 a year, $4,940 of your benefits will be withheld. Since you’re receiving $1,000 per month in benefits, this means that 5 months per year will be withheld.

Once you reach FRA (where the earnings limit no longer applies) if you have earned that extra amount for four years (thereby giving up 20 months’ worth of benefits) your benefit will be adjusted. The adjustment makes your benefit reduction appear as if you filed 20 months later than when you actually did. So if you originally filed at exactly age 62, your benefit would be reset at FRA as if you filed at age 63 and 8 months. This would have the effect of increasing your benefit by 9.44%.

If you earned enough in your job to eliminate all of your Social Security benefits between age 62 and 66, you would effectively re-set your benefit as if you had delayed filing until age 66.

During the year that you will reach FRA, the earnings limit is different, and it’s applied differently as well. You can earn as much as $40,080 for the year, and each three dollars above that limit will reduce your benefit by one dollar.

It’s important to note that these earnings must be active earnings, such as from a regular job or self-employment. Withdrawals from an IRA, while taxable, are not counted toward the earnings limit and can’t be used to reset your benefits.

Suspend

Although most of the time the concept of suspending your benefit is discussed as a part of the “file & suspend” tactic, where you file and then immediately suspend receiving benefits in one action, you are allowed to suspend your benefits at or after FRA regardless of when you originally filed. So, if you filed for your Social Security retirement benefit early and you decided that it was a mistake, when you reach FRA you have the option of suspending your benefit and allowing the delay credits to accrue on your record.

For example, if you filed at age 63 and collected benefits until you reached FRA at age 66, you could suspend your benefits at that point. If you were receiving a $1,000 benefit from filing at age 63, this was 80% of your PIA, which would have been $1,250. If you suspend at FRA and then re-file at age 70, then your delay credits would be 32% – which would bring your total benefit up to 112% of your PIA, for a new benefit of $1,400.

While your benefit is suspended your spouse and/or beneficiaries will continue to receive their benefits based on your record just the same as if you were actually collecting the benefits (subject to the family maximum). The delay credits, once earned, will not have an effect on those benefits that they’re receiving while you’re alive, but the delay credits will be applied to any survivor benefits that they receive after your passing.

The Combo

You could use the Suspend option in tandem with the Work it off strategy: by earning above the limit each year you’re improving the benefit that you’re eligible for at FRA – and then when you get to FRA you can suspend your benefits to further increase your benefit.

In addition to the above options, if none of them will fit your needs (such as if you don’t have another source of funds to get you by while you suspend and delay), if your spouse has not yet filed you can delay your spouse’s benefits as long as possible in order to maximize that benefit. Of course, this is to assume that your spouse hasn’t already filed too. There are several strategies that could help you to maximize benefits in that case, including filing a restricted application once he or she reaches FRA.

Posted on Jun 14th, 2013

by author: jblankenship.

Posted in: Annual limits, Earnings Limits, file and suspend, Social Security, Social Security spousal benefit.
Tagged: earnings test · Social Security · social security benefits

Family Maximum and File & Suspend

Jun 7th, 2013

2 comments

Radio Maximum logo (Photo credit: Wikipedia)

Note: with the passage of the Bipartisan Budget Act of 2015 into law, File & Suspend and Restricted Application have been effectively eliminated for anyone born in 1954 or later. If born before 1954 there are some options still available, but these are limited as well. Please see the article The Death of File & Suspend and Restricted Application for more details.

I recently received the following email from a reader:

I am 66 and my wife is 45, and our son is 12. I intend to delay my filing for Social Security benefits until age 70 in order to provide the highest survivor benefit for my wife since I’m so much older than her. But I also realize that my wife and son may be eligible for benefits now if I file and suspend. According to my SSA statement my benefit now at age 66 is $2,576. Since my wife and young son are eligible for 50% of my benefit (after I file and suspend), each should receive $1,288, right? When I talked to the SSA office, they told me that their benefits would be limited by the family maximum benefit, which is $4,323, and they would only receive $873.70 each. I can’t make the numbers work out, are they telling me wrong?

Unfortunately for the above situation, SSA was correct in the calculations – because of how the family maximum benefit and file & suspend work together.

Recall that the family maximum benefit limits all other dependent benefits paid on an individual’s record after the individual’s own PIA is subtracted from the family max figure. Regardless of whether the worker is currently receiving his or her own benefit, the PIA is subtracted from the family maximum benefit amount before calculating all other benefits on that record.

So in the case of the reader who emailed me, when his PIA of $2,576 is subtracted from his family maximum benefit of $4,323, there is a remainder of $1,747. This is all that’s left for dependent benefits, and it’s split evenly among the wife caring for the child under age 16, and the child who is under age 18. In this case, when the child reaches age 16, his mother’s benefit will go away, and he will be eligible for the full $1,288 (adjusted for COLAs and any changes to the father’s PIA from additional work on his record). The child will receive that benefit until he reaches age 18.

It’s important to note that if the father passes away before the child reaches age 18, the family maximum benefit will still apply, but there will be changes to the benefits received. First of all, if the father died before the child reached age 16, the mother and child would each be eligible for a 75% benefit based on the father’s projected benefit at his attained age as of his death. This benefit would be subject to family maximum benefit rules, but since there are only two of them, their combined benefit is still less than the max, so there is no limit and each would receive $1,932 (adjusted for COLAs and delay credits).

After the son reaches age 16, again his mom’s benefit would be eliminated and he would continue to receive the full 75% benefit.

If the original emailer from above had an ex-spouse who would be eligible for benefits (either spousal or survivor’s, depending on the situation) these benefits would NOT reduce the family maximum benefit available to the emailer’s current spouse and child. Plus, the family max calculation does not apply in any way to the ex-spouse’s benefits.

Posted on Jun 7th, 2013

by author: jblankenship.

Posted in: #noTOP, family benefit, family maximum, file and suspend, Social Security.
Tagged: family maximum · file and suspend · Social Security

The Qualified Terminable Interest Property (QTIP) Trust

Jun 5th, 2013

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Qtip (Photo credit: miggslives)

Often we come up against situations in planning finances for folks where some special tools are necessary. One of those situations, quite common these days, is when one or both members of a couple has children by a prior marriage. The situation brings about some interesting questions when considering how the marital assets will be divided when one member of the couple has passed on.

Daryl has three children by a prior marriage, and his wife Toni also has three children by a prior marriage. Both Daryl and Toni have considerable assets from before their marriage – each has a investments and retirement accounts in their own name: Toni’s accounts are worth $350,000, and Daryl’s accounts are worth $300,000. Given their lifestyle, they will not be needing much of their accounts early in retirement – but it’s quite likely that later in life they may need the accounts for medical care and potentially for nursing facility care.

Under common circumstances, when Daryl passes away, he will leave his assets to Toni, so that she can continue to live the lifestyle that she’s been accustomed to, as well as to ensure that she can afford adequate medical care later in life. But if he bequeaths his entire estate directly to Toni, what happens when she passes? Again, under common circumstances, she would pass along her estate to her children. The problem is, by doing this, Daryl’s children don’t get a share of the estate at all! How can this be straightened out?

One thing would be for Daryl to designate in his will that his estate would be split among Toni and his children, either equally or in some formula. This gives rise to another problem though: what if the portion that he leaves to Toni isn’t enough to cover her living expenses and medical care? His desire to make sure his kids got their fair share has left his wife possibly in dire straits when there was plenty of money available.

Another way to handle this would be for Toni and Daryl to each specify in their wills that the final estate, whichever of the two it would be, would be split among all six of their combined offspring. The problem with this is that after Toni has passed away, Daryl decides to remarry again – and then when re-doing his will he cuts out Toni’s kids, who he has always had a contentious relationship with.

Enter the QTIP

Investopedia defines a Qualified Terminable Interest Property trust as follows:

A type of trust that enables the grantor to provide for a surviving spouse and also to maintain control of how the trust’s assets are distributed once the surviving spouse has also died. Income, and sometimes principal, generated from the trust is given to the surviving spouse to ensure that he or she is taken care of for the rest of his or her life.

This type of trust does exactly what we’re looking for: after Daryl’s death, his assets become the property of his QTIP trust, which provides for Toni to be able to take income (and principal as necessary) from the assets in order to maintain her lifestyle. Upon Toni’s passing, Daryl has declared that his three children will then receive an inheritance of the remaining assets in the QTIP. Toni set up a QTIP for her estate as well, in the event that she pre-deceased Daryl, so that her children could receive a portion of the remaining estate upon Daryl’s death.

QTIP trusts can hold any type of asset, such as investment accounts, farmland, homes, and collectibles. IRAs can be owned by a QTIP trust, but special care needs to be taken when setting up the trust to ensure that the marital deduction is preserved and that the income can be distributed as appropriate to the surviving spouse. It’s usually simpler to pass an IRA directly to beneficiaries, or use a see-through trust to assist with the distribution process.

An important factor to consider when setting up these QTIP trusts is that a qualified trustee should be appointed to oversee the distribution of the assets. This trustee should be a disinterested third party who would be in a position to make good decisions about when and how much of the trust is distributed to the surviving spouse. Without this type of oversight, the survivor could diminish the QTIP first, before his or her own assets, thereby effectively disinheriting the decedent’s children.

You’d think it’s unlikely that something like this would happen, but as I’ve often said – you never really know someone until you are dividing an estate with them. Once the original owner has died, the interested parties often cease to act like relatives and revert to the basics of the transaction: they’re just people splitting up money (or other assets). It pays to get this right, in order to reduce the possibility of one or more parties taking advantage of others.

Posted on Jun 5th, 2013

by author: jblankenship.

Posted in: estate planning, estate tax, IRA, QTIP.
Tagged: estate planning · IRA

Book Review: How to Retire Happy

Jun 3rd, 2013

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“The 12 most important decisions you must make before you retire”

Author Stan Hinden, who is the former syndicated Washington Post “Retirement Journal” columnist, has just released his Fourth Edition of this book. The book is Hinden’s commentary and advice, as well as a sort of journal, as he and his wife Sara entered into and have been living in retirement over the past 17 years. Hinden retired in 1996 at the age of 69, at which time he began writing the “Retirement Journal” column. He was nominated for a Pulitzer Prize in Commentary in 1998 for his work.

This book is an excellent read for folks who are planning toward retirement or have recently retired. Hinden has organized the process into 12 decisions, some of which include: “Am I Ready to Retire?”, “What Should I Do with the Money in My Company Savings Plan?”, and “Where Do I Want to Live When I Retire?”. Mr. Hinden then walks through each of the 12 decisions with his own personal insights and choices, as well as with expert recommendations and commentary on the subjects.

The book is a fairly quick read at 250 pages, and the writing style is simple and conversational. The decision-points that Mr. Hinden discusses are thought-provoking, and he has been diligent to provide sources for additional review at the end of each Decision/Chapter. Topics covered include income taxes, pensions, retirement accounts, Social Security, Medicare, long-term care insurance, and many other categories pertinent to retirees.

The author’s wife, Sara, became afflicted by Alzheimer’s Disease in 2007, which has resulted her needing to be placed in a residential nursing facility as the disease has progressed. This was a particularly difficult section for me as I very much empathized with Mr. Hinden as he was faced with the difficult decisions associated with his wife’s condition. In a similar fashion, the author discusses the issues that he faced with his own health after learning that he needed a four-way heart bypass shortly after his retirement. These insights that are brought forth are very helpful though, as we all must consider that such decisions may likely be a big part of our own lives.

I will recommend this book to any and all folks who are looking for insights as they approach retirement. It will definitely give you additional insight as you take on this next step in your life – what Hinden mentions is likely the “final quarter” of your life. He points out though, that this final quarter needn’t “sound grim. In any football game, the last quarter is often the most exciting. The same can be true of retirement. It is one more chance to add points on the scoreboard of your life.”

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Jun 3rd, 2013

by author: jblankenship.

Posted in: Book review, IRA, Medicare, Social Security.
Tagged: book review · IRA · Social Security

The Crystal Ball

May 31st, 2013

by sraskie.

2 comments

Every so often we get asked by our clients or prospective clients which direction the market is going to go. This is always and entertaining question to get – and some of our “regulars” already know the answer.

Having a bit of a sense of humor (albeit dry sometimes) I’ll joke with clients and tell them that the day they handed out crystal balls in my investment class, it was the one time I called in sick – and you only get one chance at the coveted crystal ball. Thus, I forever lost the opportunity to predict the future of the markets. Darn.

Inevitably, clients laugh and understand the joke – and take away the underlying theme of the jocularity – that we can’t predict the future, especially in securities markets. But this doesn’t mean we can’t plan ahead.

So why do we invest? Why do we save for retirement? Why do we plan for the future? The reason is this: while we can’t predict the future, we can certainly have a great idea of where we are going and where we want to be. We understand that over the long run, it’s likely that our nest egg and the contributions to it over the years will grow, so that when it comes time to retire and actually live the future that we planned for; it’s livable and enjoyable. This is why we plan ahead and this is why people seek out financial planners.

Of course, there are always the worriers and naysayers that say, “What if the market crashes?” “I don’t want to lose all of my money.” “What happens if the market dips next week?” To which the answer is, “Well…what if it does? So what?” A good planner would never put immediate or near-term money at substantial risk.

An appropriate plan and an appropriate planner will take the time to discuss your strategy, goals and based on your aptitude for risk – will properly allocate your investment assets so that fluctuations won’t wipe out your savings.

We can tell you that the market will tank, and the market will recover. And that’s why based on an individual’s plan we allocate and manage accordingly. So, technically we can predict the future (as could anyone in this case), we just can’t tell you the exact dates crashes and recoveries happen (if that were the case, there’d be no need for financial planners).

Another way to think about it is this: your doctor may tell you to eat right, exercise, don’t smoke or abuse alcohol to preserve longevity. The plan is for you to live longer. That being said, you’re still going to get a cold or the flu (analogous to small market dips) or you may get seriously injured in an accident (analogous to a market crash – pun intended). But you (and the market) will recover. We can’t predict when you’ll get a cold or be in an accident or how long recovery will take, but we can plan accordingly.

In an absolute worst case scenario, you could die prematurely (analogous to the financial markets collapsing like a dying star). But overall, we take our doctor’s advice because we’re planning to live a long and happy life. The same is true with professional financial advice. Anything can happen, but we plan for the future.

Posted on May 31st, 2013

by author: sraskie.

Posted in: fiduciary, financial planning, goals, investing, reader questions, retirement, retirement accounts, retirement plan, retirement plans, retirement savings, saving, stock.
Tagged: fiduciary · financial planning · investment · retirement plan · retirement plans · retirement savings

Exceptions to the 10% Early Withdrawal Penalty from IRAs and 401(k)s

May 29th, 2013

33 comments

English: A clock made in Revolutionary France, showing the 10-hour metric clock. (Photo credit: Wikipedia)

When you take money out of your IRA or 401(k) plan (or other qualified retirement plan, such as a 403(b) plan), if you’re under age 59½ in most cases your withdrawal will be subject to a penalty of 10%, in addition to any taxes owed on the distribution. There are many exceptions to this rule though, and the exceptions are not the same for all types of plans. IRAs have one set of rules, and 401(k)s have another set of rules.

The exceptions are always related to the purpose for which the money was withdrawn. The exact same dollars withdrawn do not have to be used for the excepted purpose, just that the excepted expense was incurred.

IRA Exceptions

It is important to know that all distributions from your traditional IRA are subject to ordinary income tax, but some distributions are not subject to the early withdrawal penalty. The list of exceptions for early withdrawals from IRAs is as follows:

Death of the owner of the IRA – if the owner of the IRA dies, the beneficiaries of the IRA can (in fact, must) take withdrawals from the plan without paying the 10% penalty.

Total and permanent disability of the owner of the IRA – if the owner of the IRA is deemed to be totally and permanently disabled. You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration.

SOSEPP – With a Series of Substantially Equal Periodic Payments, lasting at least five years or until age 59½ (whichever is longer), there is no 10% penalty applied.

Medical Expenses – if you have medical expenses greater than 7.5% of your Adjusted Gross Income, a distribution from your IRA to cover these expenses (the excess above 7.5% of AGI) will not be subject to the penalty. Any amounts paid by insurance toward the medical expenses reduces the overall expense counted toward the excepted expenses.

Health Insurance Premiums – if you’re unemployed, you can take a distribution from your IRA to cover your health insurance premiums without paying the penalty.

Qualified higher education expenses – amounts withdrawn from your IRA to pay for tuition, fees, books, supplies, and equipment needed for enrollment or attendance of a student at an eligible higher education institution are not subjected to the penalty. In addition, if the student is at least a half-time student, room and board expenses paid for with an IRA distribution would not be subject to the penalty. The amount of education expenses is reduced by any scholarships, grants, and qualified 529 plan distributions; any amount applied to an IRA penalty exception is also not eligible to be used toward education credits, such as the American Opportunity Credit or the Lifetime Learning Credit.

First-time home purchase – amounts withdrawn from your IRA up to $10,000 that are used toward a qualified first-time home purchase are an exception to the penalty.

Qualified reservist distributions – if a reservist who is called to active duty after September 11, 2001 for a period of 179 days or more takes a distribution from an IRA (after the start of active duty and before the end of active duty) the distribution will not be subject to the 10% penalty.

Rollovers – both direct, trustee-to-trustee transfers and 60-day indirect transfers are exempted from the penalty.

Excess contributions – if you have contributed too much to your IRA, you can take out the excess contribution without penalty. However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

401(k) Exceptions

As with the IRA, most withdrawals from a 401(k) or other qualified retirement plan are subject to taxation. Early withdrawals before age 59½ are also subject to a 10% penalty, with some exceptions. The exceptions are as follows:

Death of the participant – this is the same as the exception for an IRA above.

Total and permanent disability of the participant – same as with an IRA.

SOSEPP – same as with an IRA.

Medical Expenses – same as with an IRA.

Qualified reservist distributions – same as with an IRA.

Rollovers – same as with an IRA. However, an indirect 60-day rollover (not a trustee-to-trustee transfer) is subject to mandatory 20% withholding. If the withheld 20% is not transferred within 60 days, this amount may be subject to both taxation and the 20% early withdrawal penalty.

Corrective distributions – just like with an IRA, if you have contributed too much to your 401(k), you can take out the excess contribution without penalty. However, any growth that is attributed to the amount that you over-contributed will be subject to the 10% penalty and taxes when withdrawn.

Separation from service after age 55 – if you leave employment after the age of 55, you are eligible to take distributions from your 401(k) or other QRP without penalty. This is only valid while the funds are still in the 401(k) – if you rollover the funds to an IRA, this option is no longer available. If the participant is a public safety employee (police, fire, or emergency medical technicians), the age is 50 or older.

Qualified Domestic Relations Order (QDRO) – in the event of a divorce, if the 401(k) is to be divided or distributed to the ex-spouse of the participant, withdrawals from the plan by the ex-spouse are not subject to the 10% penalty.

Posted on May 29th, 2013

by author: jblankenship.

33 comments already - add to the conversation!

Posted in: 401 k, 401 k 403 b, Early Distribution, eligible rollover distribution, inherited IRA, IRA, qrp, qualified retirement plan.
Tagged: early retirement · IRA · qrp · rollover

Avoid Awkwardness in the Afterlife–Confirm Your Beneficiary Designations

May 24th, 2013

1 comment

This is a topic that I cover with all clients, and one that I recommend you for everyone with retirement plans and other accounts with beneficiary designations. Too often we think we have the beneficiary designation form filled out just the way we want it, and then (once it’s too late) it is discovered that the form hadn’t been updated recently – and the designation is not what we hoped for.

I made this recommendation to a client not long ago. He assured me that he had all of his designations set up just the way he wanted. His wife, sitting next to him in our meeting, asked him to make sure – talk to the IRA custodian and get a copy of the designation as it stands today. A bit miffed about it all, he agreed to do so, and did the next day. Guess what he found – as it stood on that day, his IRA beneficiary designation form indicated 100% of his IRA would pass to his ex-wife from 15 years ago! Plus, he had no secondary beneficiaries named, which meant that if the ex predeceased him, HER heirs would be the primaries. Thankfully he had checked on this to avoid this awkward and possibly devastating situation.

Know what was fixed pretty much immediately?

Take the time

You owe it to yourself and your heirs to take the time to review your beneficiary designations and keep copies of them in your “dead file”. This includes IRAs, Roth IRAs, 401(k)/403(b)/457 plans, and other pensions or retirement plans. You also may have POD or TOD (Pay on Death or Transfer on Death) designations on non-retirement accounts – confirm these and keep copies as well.

For your standard retirement accounts, such as IRAs, 401(k)s and the like, you typically have the option of naming a primary beneficiary (or beneficiaries) and a secondary or contingent beneficiary or beneficiaries. It makes a huge difference on these accounts that you name a specific person (or persons) as the primary beneficiary, and a specific person (or persons) as the contingent beneficiary. With IRAs, if you leave the designation blank, you may be taking away important options for your heirs.

If you leave the primary beneficiary designation blank you are leaving the transfer of your IRA up to the custodian’s default designation. Quick! What’s your IRA custodian’s default beneficiary designation?? I didn’t think you’d know.

Often this default is your spouse first, and then your “issue” – meaning your children and other descendants. Other times, the default beneficiary is your estate. In the event that the estate is the default beneficiary, any beneficiaries of the estate will receive the IRA, but they will not be able to utilize the “stretch” option of receiving payout of the account over their remaining lifetimes. This is because the IRS rules state that a “named beneficiary” must be in place in order to use the stretch provision. If no “named beneficiary” exists, the stretch option is not allowed. If the default is your spouse and your issue, these can be treated as “named beneficiary” if they are alive.

Discuss with your heirs

At face value, even though you think your intent for your beneficiary designations is clear, it might not be clear to your heirs. For example, you may have chosen to pass along half of your IRA to your youngest child and only a quarter to the older two children because you believe the youngest child can use the money more than the other two. Or maybe you decided to leave the entire IRA to your oldest daughter, and you want to designate your three sons to split up the farmland – which you believe is an equitable division.

Whatever you’ve decided, especially if there are perceived inequities in your division plan, you should take the time to review your plan with your heirs. If that makes you uncomfortable, there are a couple of things to consider: First, if you’re uncomfortable discussing it with them, imagine how uncomfortable your heirs may be when the time comes to distribute your estate. Maybe it’s not such a good idea after all if it could cause contention among your heirs. Second, if you still believe your split is the right way to go, you should explain your plan to someone – your designated executor would be a good choice. And the designated executor should be a disinterested separate party, someone who isn’t receiving benefit from your estate plan, in order to keep the process “clean”. Otherwise, if one of the heirs is your executor and the executor is perceived to receive preferential treatment, again you’ll have some contention among your heirs.

If there are complex instructions involved, consider making an addendum to your will. Instructions in your will would have no impact on the beneficiary designations on your IRAs and other plans (these pass outside of your estate as long as you’ve made specific designations) but other asset divisions aside from retirement accounts may require explanation for your heirs to understand your intent. Don’t expect that everyone will understand or agree with your thought process when you’re gone. Explaining your thought process in advance will likely help to ensure that your division plan doesn’t result in a family rift.

Take the time to review your beneficiary designations. Make sure that you have the primary beneficiary or beneficiaries that you want, and the percentages that you’d like each to have. Also make sure that you have named contingent beneficiary or beneficiaries in the event that your primaries have predeceased you. Lastly, make sure that you note how division is done after the death of the beneficiaries: per stirpes or per capita.

Posted on May 24th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

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

Per Stirpes / Per Capita–What Does it Mean?

May 22nd, 2013

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Example of per stirpes inheritance (Photo credit: Wikipedia)

When working with your estate planning (even if you don’t realize you are) you may run across the terms per stirpes and per capita. Choose one type over the other and you could have a significant impact on who eventually receives your estate. So what do these two terms mean?

Dictionary.com defines the two terms as follows:

per stirpes – noun; pertaining to or noting a method of dividing an estate in which the descendants of a deceased person share as a group in the portion of the estate to which the deceased would have been entitled.

per capita – noun; noting or pertaining to a method of dividing an estate by which all those equally related to the decedent take equal shares individually without regard to the number of lines of descent.

This probably seems like just so much gunk to you, so let’s look at an example.

Joe has four children, Anna, Benny, Björn, and Agnetha. Anna and Benny have no children. Björn has three boys: Neil, Alex and Geddy; while Agnetha has two boys: Peter and Eric. Joe is planning his estate and he wants to split his assets evenly among his four kids when he dies, and if the any of the kids dies before he does, he wants the grandkids to receive the share of the child that died.

Joe designates each child as an equal beneficiary of his estate, identifying each by name. He then indicates that he wishes for the grandchildren to receive a share in the event that their parent dies before Joe. He’s stuck deciding whether or not to choose per stirpes or per capita for the distribution. Typically the verbiage would be “I leave my assets to my then living descendants, per capita” or “I leave my assets to my then living descendants, per stirpes”.

Let’s look at what will happen if he chooses one type of distribution over the other.

If Joe Chooses Per Stirpes…

… and Anna (with no children) dies before Joe, then Benny, Björn and Agnetha will each receive 1/3 of the estate, and a share would not be created for Anna. The same would be true if Benny dies before Joe – in fact, if both Anna and Benny predecease Joe, Björn and Agnetha will receive 50% shares in the estate, and no shares would be created for Anna or Benny.

On the other hand, if Björn died before Joe, then Anna, Benny and Agnetha would each receive a 25% share, and Björn’s children, Neil, Alex and Geddy would rush to receive 8 1/3% of the estate, or Björn’s 25% share divided into thirds.

If Agnetha died before Joe, her children Peter and Eric could humbly and blindly accept 12 1/2% each, which is Agnetha’s 25% share split in two.

If any of the children of Agnetha or Björn had also predeceased Joe, the division would only be among the living grandchildren, with no provision for the deceased child. That is, unless the deceased child had children of his own, which would be Joe’s great-grandchildren, in which case the great-grandchildren would receive the share of the deceased grandchild. This would continue for all living heirs until the estate is completely distributed.

If Joe Chooses Per Capita…

… and all of the children and grandchildren survive him, each of them would receive 1/9 share. This is because per capita designates that all living descendants, by headcount, split the estate equally.

If any (or several) of the descendants of Joe have predeceased him, the shares would adjust for the remaining number of heirs. For example, if Björn died before Joe, then Anna, Benny, Agnetha, Neil, Alex, Geddy, Peter and Eric would each receive 12 1/2% of the estate. The shares would adjust for any others that predeceased Joe, or for any additional grandchildren or great-grandchildren that may have been born prior to Joe’s death.

Common usage

As you can see, per stirpes results in what most folks consider to be the most fair distribution among heirs. The inequity that comes up when these designations are used is when an heir predeceases the decedent in question (Joe from our example above), he or she would receive no share of the decedent’s estate, not even via his or her own estate. This can be rectified by naming the primary beneficiaries (Anna, Benny, Björn and Agnetha in our example), and then indicating that contingent shares could be designated to their estates if no living heirs, or to their living heirs, per stirpes.

Per capita is not used often, and it can cause some problems. Notwithstanding the fact that your children are penalized if they don’t happen to reproduce while their siblings did, when assets are transferred more than one generation away from the decedent, there can be an additional generation skipping transfer tax (GSTT) applied to the distribution. Sometimes per capita is used by generation, which can result in an even distribution among a particular generation, if that’s your intent.

Posted on May 22nd, 2013

by author: jblankenship.

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Posted in: beneficiary, estate tax.
Tagged: estate planning

Book Review: Born to Blog

May 20th, 2013

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Taking a departure from my regular topics of taxes, retirement accounts, and Social Security, today I’m reviewing a book dedicated to the topic of blogging. This is another of the books that McGraw-Hill has provided for me to review (see note below).

This book, by Mark W. Schaefer and Stanford A. Smith, provides a quick-read overview of the activity of writing a blog successfully. As with any venture, it’s important at the start to have a goal for the activity, and for many folks it’s simply to get a message out there about a product or service. For others, the goal is to be a source of information; others yet look to showcase collections of graphics, photos, audio and/or video. And many hope to gain an audience that will somehow pay off for them – either from sales of products, services or subscriptions, or from ad revenue from third-parties who pay the owner of the blog to advertise on the site.

Schaefer and Smith take you through this entire process, step-by-step. The perspective of an independent blogger is discussed as well as that of a corporate marketing effort. With the tools discussed in this text, virtually anyone can start up a successful blog, on virtually any topic.

I particularly liked the early sections on the types of bloggers based on how they produce content – and there are several. Storytellers write about their own or others’ experiences; dreamers write about things they’d like to change or see changed; persuaders attempt to get the reader to undertake their point of view (often politically, economically, or religiously); teachers provide lessons on topics that are of interest to their readers; and curators collect things – quotes, photos, audio, video, etc..

If you are just starting out on your mission to produce a blog, an excellent place to start is to pick up this little book. It’s a short read (165 pages, good for a long flight or an afternoon or two on the beach), and the writing is straightforward, understandable and complete. I would recommend this book to anyone starting off with a blog, or anyone who has already been blogging and is beginning to have difficulties getting the results you’d hoped for.

Posted on May 20th, 2013

by author: jblankenship.

Posted in: blogger action, Book review.
Tagged: book review

Book Review: Think, Act, and Invest Like Warren Buffett

May 13th, 2013

1 comment

This book, by Larry Swedroe, is a must read for individual investors that are looking for the answer to the age-old question – How should I invest?

Warren Buffett certainly makes any list of “best investment minds” of our era, no matter who you are. Author Larry Swedroe would likely make any such list as well, given his many books that he has written on the subject, such as “The Only Guide to a Winning Investment Strategy You’ll Ever Need”, “Investment Mistakes Even Smart Investors Make”, and just as well, the subject of this review.

Mr. Swedroe starts out with the basics of Mr. Buffett’s advice, with the sage’s commentary backed by the facts behind them. For example, regarding market timing: “Our favorite holding period is forever.” Swedroe follows this advice with evidence of why it pays off for the individual investor in the long run, due to the fact that the only time most individual investors want to sell is at exactly the wrong time, when markets are tanking. After developing a sound investment strategy, using low-cost index mutual funds as the foundation, it’s best to stick to your strategy through thick and thin.

Another example is offered in these words of wisdom from Buffett: “The most important quality for an investor is temperament, not intellect.” This comment is particularly useful when considering whether or not you should pay attention to the likes of CNBC, Investor’s Business Daily, or other “noise” going on in the media. Instead, having a sound investment policy that you stick to, maintaining your temperament (don’t let your emotions drive your decisions, in other words), is the way to success in investing.

Throughout the book, Mr. Swedroe provides additional tools and insights that can easily be put into play immediately. There is an example of a personal Investment Policy Statement (the guide you’ll need to help you through the “tough times”), as well as a basic strategy for developing an investment allocation plan that is diversified, low-cost, and will provide you with stable investment returns throughout your life. In addition, Mr. Swedroe covers the topic of how and why you might choose to hire a financial advisor, along with advice on the type of advisor you should choose (and here’s a clue, Dave Ramsey fans: it’s not commissioned advisors, it’s fee-only advisors) because it’s not always about finding the lowest up-front cost, it’s more about finding someone who will work in your best interests.

In addition to investing, Mr. Swedroe takes time to point out that the “activity” of investing should not be a focus for the individual investor – that the time spent on researching, managing, and monitoring any type of investment aside from the index-type of investments that he recommends, is lost time. Think about it: if you spent two hours a day on these investment activities (which is nowhere near enough time, in my opinion) in addition to your “regular” job, that’s 730 hours a year that you could be coaching your kid’s soccer team, re-connecting with your spouse, or spending time with your aging parents. Implementing the simple strategies in this book will cut down your time involved in investing activities to something like an hour a quarter – yes, only four hours a year!

The last section of the book provides Mr. Swedroe’s “30 Rules of Prudent Investing” – which, on its own provides a fantastic foundation of insight for the individual investor to follow for success. I highly recommend this book for anyone who has searched high and low for the “silver bullet” to investing success. As you may know, there’s no such thing as a real “get rich quick” scheme in the investing world – the real “silver bullet” is this simple, boring, use of index funds and dogged sticktoitiveness. Do yourself a favor and read this book, shut off CNBC, and get back to enjoying life. You’ll do wonders for yourself and your life.

Posted on May 13th, 2013

by author: jblankenship.

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Posted in: Book review, investing, investment.
Tagged: book review · investment

State Income Tax and Retirement Income

May 8th, 2013

by sraskie.

3 comments

On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation.

Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income.

If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the federal and state level. So in this case the money going into the Roth IRA has been “hit twice” with federal and state taxes.

One possible way to avoid this double whammy (going by current Illinois law) is to contribute to your employer’s plan and then at retirement or whenever you leave your job, convert that money to a Roth IRA. In this case the money from your paycheck is already deferred from state taxation and then when it’s converted to a Roth IRA, avoids state income taxation again – since it’s income from a retirement plan and considered retirement income – which Illinois does not tax. This is evidenced by the 1099-R you’ll receive at the time of conversion.

Another way to avoid this is if your employer’s plan allows, convert your 401(k) to a Roth 401(k) while you’re still employed. Again, you’ll pay federal income tax but avoid the state taxation if your state excludes retirement income for tax purposes. If you’re in a higher tax bracket, you may consider staging your conversions up to the point where you maintain low tax costs (converting small amounts over many years). Or you may just want to wait to convert the whole amount when you know you’ll be in a lower tax bracket.

Posted on May 8th, 2013

by author: sraskie.

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Posted in: 2012 tax year, 2013 tax year, 401 k, 401 k 403 b, 401k, 403 b, 457, conversion, conversions, income tax, IRA, retirement accounts, roth 401 k, Roth 401(k), roth conversion, Roth Conversion, Roth conversion, roth ira, Roth IRA, roth ira account, roth ira contribution, roth ira contributions, roth ira conversion, state income tax, tax, tax deferral, taxable compensation.
Tagged: 401 k · 401k · IRA · retirement accounts · retirement plan · retirement savings · roth conversion · roth ira · roth ira conversion · tax

Fixing an IRA With the “Wrong” Beneficiary

May 1st, 2013

2 comments

Quite often, for many different reasons (often known only to the deceased original owner), the original owner of an IRA designates a beneficiary that the survivors don’t necessarily agree with. It might be that only one of several children is designated, or perhaps additional beneficiaries are designated along with a spouse. In cases like these, there are ways to make changes to the outcome of the inheritance. In this article we specifically deal with the case where only one of four children was designated as the primary beneficiary of the IRA.

To resolve the situation, let’s consider the following IRA: John, the decedent, designated April (his daughter) as the primary beneficiary of his IRA. It isn’t known why John only designated April as the beneficiary, as he has three other children – Bill, Chuck, and Dale – and John had only his IRA as an asset to pass along to the children. April could choose to take the entire IRA as her own and receive payments over her lifetime using the stretch rules, but she sees the inherent lack of fairness in the situation, so she wants to make the IRA available to her brothers as well.

One way to accomplish this would be for April to withdraw 75% of the IRA and split that amount with her brothers. She would then be able to stretch out the payments on the remaining 25% over her lifetime. Mission accomplished, right?

The problem with this option is that April would have to pay tax on the 75% distribution – and since the IRA is sizeable, this is a significant cost. Naturally she could just pass along this tax cost to her brothers in the form of a reduced payment, but this isn’t a very efficient way to distribute the money.

On the other hand, April could maintain the account in her name and stretch out payments over her lifetime, splitting each payment (after tax) among herself and her brothers. Again, this accomplishes what she had set out to do, but she’s still paying tax on the entire amount and since our tax system works on a graduated scale, the tax on 100% received by one person is likely to be much higher than the tax would be for four persons each receiving 25% from the account. In addition, the three brothers would be required to wait until April decides to take a distribution before they would have access to the account. Bill for example, would prefer to withdraw a large sum right away as he’s building a home and could use the funds for the construction. This would be very inefficient (tax-wise) if April had to make the withdrawal for him and pay the tax at her higher rate.

So – what else could be done? It would be great if there was a way for April to re-write the beneficiary designation so that all four children were considered to be the beneficiaries, but that’s not possible. What is possible is to re-direct a portion of the inheritance, by way of a method called disclaiming.

It’s important to know how to properly disclaim the inheritance of an IRA. The person disclaiming all or a portion of an IRA must not be an eventual beneficiary as a result of the disclaimer. Plus, the person disclaiming must not be in a position to direct who are the new beneficiaries; the natural course of the law must be followed. If either of these rules is broken, the disclaimer is considered to be nonqualified, and any distribution would be considered to have been done by April. Any amount transferred to her brothers would be considered a gift, subject to gift taxes.

So, if April disclaims the entire IRA, the new beneficiary would be John’s estate. Since John’s will dictates that the four children will split all of his assets equally, this would accomplish the desired result, right? No, not really.

The problem is that, when April disclaims the entire IRA, she is still an eventual beneficiary of the IRA since the estate becomes the de facto beneficiary, breaking the first rule above. In addition, since the estate isn’t a “person”, the stretch rules can’t be used for this IRA at all. When there is no real person as a beneficiary of an IRA, the entire account must be paid out within five years, rather than stretched out over a beneficiary’s lifetime.

What April should do is to disclaim 75% of the IRA, and also disclaim rights to the IRA portion of the estate that results from her first disclaimer. This gives her 25% of the original IRA with the stretch benefits still intact. In addition, since she’s disclaimed her right to the estate portion of the IRA asset, her brothers each have right to 25% of the IRA – 1/3 each of the 75% that April disclaimed. This portion passes through the estate to the brothers.

The brothers will not be allowed to stretch out their payments from the account for more than five years – this is one unfortunate circumstance that can’t be avoided. But otherwise, the eventual distribution is much more “fair” – even if it’s not what John had planned. And each brother has control over his portion of the funds, at least for distribution purposes. Bill can take the large distribution right away, and Chuck and Dale can delay up to five years before taking a distribution. And each of the four siblings will only pay tax on the distribution that he or she takes.

Posted on May 1st, 2013

by author: jblankenship.

Posted in: disclaim, inherited IRA, IRA.
Tagged: inherited IRA · IRA

Book Review: Strategic Capitalism – The New Economic Strategy for Winning the Capitalist Cold War

Apr 29th, 2013

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Author Richard A. D’Aveni has written a very compelling book with Strategic Capitalism, a book that provides some very important information for Americans to review and consider due to the coming economic cold war between the United States and China. Mr. D’Aveni asserts that the United States’ traditional version of capitalism must be adapted in order to compete with China’s conglomeration of various types of capitalism.

The beginning of the book details the many different pure types of capitalism – Laissez-Faire, social-market, managed, and philanthropic – and how these have been used over the years in many different economies. Mr. D’Aveni points out that rarely is a single pure type of capitalism ever the only type of capitalism in use in an economic system, but rather that many different forms of capitalism are blended together to work in the economic and political interests of the country or union in question.

The US has primarily used laissez-faire capitalism with specific components of managed capitalism to meet certain needs of the era. China (of late) has been using managed capitalism aggressively to both protect and promote the mostly state-run companies there, as they seek to dominate across the globe. This protection and promotion has not followed the same rules that the US has established and most western businesses adhere to. Due to the fact that the type of capitalism used by China is thwarting the “old rules” of business, in order to continue to compete in this new world, the US must adapt the form(s) of capitalism that are used.

The second part of the book goes into great detail about the types of changes that the US must make – and admittedly, D’Aveni points out that these are mere suggestions intended to start the dialog. Among the radical changes that the author suggests are: dropping out of the World Trade Organization (China is thwarting the rules and there is no mechanism to force compliance), dropping out of NATO (not enough economic or military support from most members to make up for the cost to the US), and dropping out of the United Nations (similar reason to NATO).

At the same time, the US should consider creating several new alliances that can be used to control the economic sphere that the US is to dominate, while at the same time limiting the areas that China can control. D’Aveni also advocates using tactics of Sun Tzu (how apropos!) to eliminate China’s advantages indirectly rather than directly. But first, the US needs to get its national economy in order, another topic that the author covers as well.

One area that can be resolved somewhat readily is with our extensive social programs, specifically Social Security, Medicare and the coming Obama-care. True means testing could be put into place for all programs, as benefits are being wasted on folks who don’t really need them, where the programs were designed to provide a safety net for the truly needy. Social Security taxation could be applied to all income levels as well, just like Medicare tax. Health and retirement benefits could be handled in large part by causing compulsive savings programs to be put into place for all workers. Health benefits would then be mostly covered (except for catastrophic costs) by the individuals’ own savings plans, which would likely reduce the over-use of the system and cause folks to make better health-care decisions, since the cost is borne by the individual, rather than “magically” by a faceless insurance company.

In terms of a very good primer on the capitalism environment in the world today, Mr. D’Aveni has written an excellent book. In addition, the suggestions he has made are very well-developed, and even though it’s not likely that his suggestions would be implemented completely, they provide a good basis for discussion. This book should be required reading by all policy makers in the western world, as I believe (at least in the US) that too many of our economic policies are designed for short-term solutions to situations that will garner votes, rather than longer-term solutions to our global economic position.

Posted on Apr 29th, 2013

by author: jblankenship.