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

Posted in: income tax, tax preparers.
Tagged: income tax · irs · tax preparers

Notify Social Security of Major Changes in Your Life

Mar 1st, 2013

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You know how, after you’ve put your kids through college and they go off on their own, sometimes you don’t hear from them as often as you’d like? Major things occur in your kids’ lives and you don’t know about them until after the fact, possibly long after. So you get onto them about it, and ask the kids to call more often (or you call them more often) so that you can keep up with what’s going on…

It’s kinda like that with the Social Security. They want to know when major changes occur in your life, as soon as possible. This is primarily due to the fact that, quite often, these changes will result in adjustment to your Social Security benefits.

The first one that comes to mind is the death of a Social Security recipient. Naturally you need to notify the Social Security Administration as soon as possible upon the death of a recipient. The benefit that the deceased recipient was receiving might transfer to his or her spouse if the rules allow. Otherwise, the benefit will cease for that recipient, and other benefits may begin for dependents of the recently deceased.

If you are receiving Social Security benefits and you get married (or re-marry, either after the death of a spouse or after a divorce), it’s important to let the SSA know about your change of marital status. This is because your marital status may have an impact on any benefits that you are receiving that are based on a former spouse’s record. In addition, a new marriage could result in new dependents for you, and so your new dependents could be eligible for benefits based on your record.

In addition to death and marriage, SSA also wants to know if you are earning more than the allowable limits if you’re less than Full Retirement Age. This is because a portion of your benefit will be withheld due to the additional earnings. You can’t escape it, they’ll eventually figure this out and possibly ask for repayment. Plus, if you’re receiving a pension from a non-SS covered job, you need to let SSA know about it so that your benefit is adjusted for WEP or GPO if either of those factors apply to your situation.

Obviously you need to let SSA know if your name or address changes and if your direct deposit account changes – you need to make sure that you will continue to receive your benefits and that important notices make them to you in the mail.

If your change of address includes an extended stay outside of the United States, you need to let SSA know about it. You should also know that there are some countries that Social Security can’t send payments to – Cambodia, Cuba, North Korea and Vietnam. Otherwise, you can have payments sent to you if you’re living in another country, but you’ll need to arrange this with Social Security.

Posted on Mar 1st, 2013

by author: jblankenship.

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Posted in: Social Security, social security administration, social security benefits.
Tagged: Social Security · social security administration

Don’t Forget to Pay Tax on Your 2010 Roth Conversion

Feb 27th, 2013

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Remember back in those heady days in 2010, when you finally had carte blanche eligibility to convert your IRA funds to a Roth IRA regardless of your income? And then there was a special provision that the IRS made available: you could convert money to your Roth IRA in 2010, and delay recognizing the income and paying the tax over the next two years… remember that? That was so cool.

However.

(Ever notice how there’s always a “however” in life?)

Here we are, two years later, and NOW you have to pay tax on the Roth conversion that happened way back then. You might have forgotten it altogether, but you can bet the IRS hasn’t forgotten.

Hopefully you didn’t forget this on your 2011 tax return that you filed in 2012 as well. At that time, you should have recognized half of the deferred Roth IRA conversion from 2010 on your 2011 return, and paid tax on that half. Now, in 2012, you’re up to the point where you can finish this off. On your 2012 return you will recognize the remaining half of the 2010 conversion, and pay the tax on it.

The good news is that the tax rates haven’t gone wild like a lot of folks projected – as long as your income didn’t dramatically increase your rates should be roughly the same as they were in 2010. In addition, if you decided to do your Roth Conversion as soon as possible in 2010 and you invested in the S&P 500 (for example), you would have experienced an increase of more than 33.3% to this writing (February, 2013). That should help take the sting out of the tax cost.

Just don’t forget to finish paying the taxes on your conversion this year. The penalties and interest on the unpaid tax could take all of the benefit out of your conversion/delay strategy.

Posted on Feb 27th, 2013

by author: jblankenship.

Posted in: #noTOP, 2012 tax year, income tax, IRA, qrp, Roth Conversion, Roth IRA.
Tagged: income tax · IRA · roth conversion · roth ira

Know Your Options When Talking to Social Security

Feb 22nd, 2013

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Cardpunch operations at U.S. Social Security Administration

When you get ready to file for your retirement benefits, it’s important to understand what options are available to you before you talk to the Social Security Administration. There are many ways to get a good understanding of your options, including working with your financial advisor, reading up on the subject (this blog is a good place to start!), and talking to friends and relatives who have already gone through the process.

The reason it’s important to know your options is because the Social Security Administration staff that you may encounter are not trained to help you maximize your lifetime benefits – they are trained to help you maximize the benefit that you have available to you today. Often the options that the SSA staff present to you are not the best options for you in the long run. In addition, SSA staff are absolutely overwhelmed by the volume of folks that they are in contact with. As I understand it, disability claims are backlogged by as much as three years in some cases – so you can imagine how difficult it is for the staff to handle new, unusual cases.

Listed below are a few examples that I’ve heard recently where folks have gotten erroneous or incomplete responses to basic questions presented to SSA staff. This is not intended to be an exhaustive list, just a few things I’ve heard about recently.

Restricted Application

An husband, age 66, wishes to delay his filing to age 70. At the same time, his wife, age 62, is filing for her own benefit today. The husband wishes to file a restricted application for spousal benefits only – which would allow him to receive a benefit equal to half of his wife’s PIA (not her reduced benefit) while he continues to delay his own benefit to age 70. SSA staff told him that since his own benefit would be greater than half of his wife’s PIA, he would not be able to do this.

Of course, if you’ve read this blog or my book, you know that this is incorrect. The man called me and asked about it – and I told him to go back to the SSA and make the request again, specifically requesting to file a “restricted application for spousal benefits only”. I then recommended that if he still received a negative response to request to speak to a supervisor about it. Eventually, with this guidance, he was able to get the benefit that he asked for.

“Bonus” Lump Sum

If you are over Full Retirement Age (age 66 these days) and you go to or call the Social Security Administration to file for retirement benefits, you may be presented with an option for a “bonus” lump sum of up to six months’ worth of benefits, to be paid to you when you receive your first check. Don’t fall for it without knowing what’s going on!

What is happening is that the SSA staff is suggesting an option to you that is available – of retroactively applying for benefits six months prior to the actual date. Effectively, if you are (for example) 67 years old when you take this option, you will be filing as if you are 66 years, 6 months of age. This will reduce your Delayed Retirement Credits by that 6 months, or 4%. You’ll end up with a lump sum check for the six months that you hadn’t received up to that point, but your future benefits will be 4% less than they would have been had you filed at your attained age of 67.

If this is what you want, then go for it – but realize that not only is your own future benefit going to be permanently reduced from what it could have been, any survivor benefits that your spouse will receive are also reduced.

Divorcee planning

A divorced person who is qualified to receive benefits based upon her ex’s work record often has difficulty in planning when to receive benefits. This is especially troublesome if you are pretty certain that your Spousal Benefit will be significantly more than your own benefit, and you’d like to maximize that benefit. The trouble is that you may not have access to the complete information about your ex’s benefit (and therefore, any spousal benefit you could receive).

The key to this is to have the correct documentation about your situation when you talk to Social Security. Most often, this is going to require a visit to the local office, although I’ve been told this can be done over the phone. I assume in a case like that there are several calls involved because you’ll have to send your documentation for the SSA to verify.

At any rate, if you have your marriage license and your divorce paperwork, which show that you were married for ten or more years and the divorce occurred more than two years ago, along with your ex’s Social Security number and date of birth, the SSA staff will be able to provide you with information about what benefits you are eligible to receive based on the ex’s record. Without this documentation, you will be denied access to the information.

Posted on Feb 22nd, 2013

by author: jblankenship.

Posted in: Delayed Retirement Credit, divorce, restricted application, Social Security, social security administration, Social Security spousal benefit.
Tagged: divorce · DRC · restricted application · social security administration

Rolling Over a 401(k) into a New Employer’s Plan

Feb 20th, 2013

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missed-rollover When you change jobs you have a choice to make regarding your retirement plan at former employer. If the plan is a 401(k), 403(b), or other qualified plan of that nature, you may have the option to roll the old plan into a plan at your new employer.

The new employer’s plan must allow rollovers into the plan – this isn’t always automatic. Most plans will allow rollover of former employer’s plans, but not all. Once you’ve determined that the plan will accept a rollover, you should review the new plan to understand whether or not it makes sense to roll your old plan into it, or choose another option. Other options may be: rollover the old plan into an IRA, convert the old plan to a Roth IRA, leave the old plan where it is, or take a distribution from the old plan in cash.

In this article we’ll just deal with rolling over the old plan to your new plan.

If the new plan has some compelling features, such as access to very low cost institutional investments or attractive closed investment options, or if the plan has very low overhead and great flexibility, you might want to rollover your old plan into it. Other reasons that might compel you to rollover the old plan might be – to have access to loan features (IRAs don’t have this), access to your funds when leaving your employer after age 55 but before age 59½, and ERISA protection against creditors.

There may be reasons to leave your old plan at the old employer though. The two that come to mind are NUA treatment of stock of the old employer, and if you think you’ll need access to the funds before you leave the new employer (especially if you’ve left that employer after age 55).

So after reviewing the options and features, you’ve decided to rollover the old plan to the new employer’s plan. It’s a relatively straightforward process: you contact the old plan’s administrator and request a rollover distribution form. You should have already contacted the new plan’s administrator to ensure that the new plan will accept a rollover. Once you have the rollover distribution form from the old employer, get any pertinent information from the new employer, such as your employee id, or an account number for the new plan.

On the rollover distribution form, you’ll have the option to send the distribution directly to the new plan – called a trustee-to-trustee transfer. In this manner, the funds never come into your possession. This is important, because if you take distribution in cash from the old plan, the IRS requires that 20% is automatically withheld from the distribution. You could still send the distribution to the new plan – but you’d have to come up with the 20% that was withheld in order to make the transfer “whole”. It’s not required that you make a complete transfer, but if you take any of the funds in cash, including the withheld 20%, this money will be taxable as ordinary income, and if you’re under age 59½ it will likely also be subject to an additional 10% penalty.

After all of this has occurred, your new plan will have the additional old plan money rolled into the account. Most likely this will be entirely in cash when it arrives in the account – so you will need to make investment allocation choices for the new addition to the account.

Posted on Feb 20th, 2013

by author: jblankenship.

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

Choosing a Tax Preparer

Feb 18th, 2013

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It’s that time of year again – time to do your income taxes. While lots of folks will opt for the “box”, using one of the many do-it-yourself options like TurboTax, Tax Cut and others, many folks will choose to go to a professional tax preparer to have their returns prepared.

There are several types of professionals who are qualified to prepare your tax return: Certified Public Accountants (CPAs), attorneys, Enrolled Agents (EAs), and unenrolled tax preparers. You’re likely familiar with CPAs and attorneys, so I won’t go into explaining them. Enrolled Agents (EAs) are enrolled with the IRS and empowered to represent taxpayers before the IRS. This type of professional must pass a rigorous series of exams to be enrolled, and then must complete 72 hours of continuing education every three years to remain enrolled.

CPAs, attorneys and EAs (as well as Enrolled Actuaries) are among a group known as Federally Authorized Tax Practitioners (FATPs). There are other folks who are authorized to prepare taxes as well – but some of the qualifications are a bit up in the air at the moment. The Registered Tax Return Preparer (RTRP) designation is to be the new designation for those outside the FATP group, but this designation has recently been challenged in court. This leaves the unenrolled preparer group with no regulation – essentially it’s the wild, wild west, you don’t know what qualifications your preparer may have. Sometimes, they even double as a Statue of Liberty <gasp!>.

So what should you look for when choosing a tax preparer? The IRS recently issued their Tax Tip 2013-07, which lists Ten Tips to Help You Choose a Tax Preparer. The actual text of the Tip is listed below:

Ten Tips to Help You Choose a Tax Preparer

Many people look for help from professionals when it’s time to file their tax return. If you use a paid preparer to file your federal income tax return this year, the IRS urges you to choose that preparer carefully. Even if someone else prepares your return, you are legally responsible for what is on it.

Here are ten tips to keep in mind when choosing a tax return preparer:

Check the preparer’s qualifications. All paid tax return preparers are required to have a Preparer Tax Identification Number. In addition to making sure they have a PTIN, ask if the preparer belongs to a professional organization and attends continuing education classes.
Check on the preparer’s history. Check with the Better Business Bureau to see if the preparer has a questionable history. Also check for any disciplinary actions and for the status of their licenses. For certified public accountants, check with the state boards of accountancy. For attorneys, check with the state bar associations. For enrolled agents, check with the IRS Office of Enrollment.
Ask about service fees. Avoid preparers who base their fee on a percentage of your refund or those who claim they can obtain larger refunds than other preparers can. Also, always make sure any refund due is sent to you or deposited into an account in your name. Taxpayers should not deposit their refund into a preparer’s bank account.
Ask to e-file your return. Make sure your preparer offers IRS e-file. Any paid preparer who prepares and files more than 10 returns for clients must file the returns electronically, unless the client opts to file a paper return. IRS has safely and securely processed more than one billion individual tax returns since the debut of electronic filing in 1990.
Make sure the preparer is accessible. Make sure you will be able to contact the tax preparer after you file your return, even after the April 15 due date. This may be helpful in the event questions arise about your tax return.
Provide records and receipts. Reputable preparers will request to see your records and receipts. They will ask you questions to determine your total income and your qualifications for deductions, credits and other items. Do not use a preparer who is willing to e-file your return by using your latest pay stub before you receive your Form W-2. This is against IRS e-file rules.
Never sign a blank return. Avoid tax preparers that ask you to sign a blank tax form.
Review the entire return before signing. Before you sign your tax return, review it and ask questions. Make sure you understand everything and are comfortable with the accuracy of the return before you sign it.
Make sure the preparer signs and includes their PTIN. A paid preparer must sign the return and include their PTIN as required by law. The preparer must also give you a copy of the return.
Report abusive tax preparers to the IRS. You can report abusive tax preparers and suspected tax fraud to the IRS on Form 14157, Complaint: Tax Return Preparer. If you suspect a return preparer filed or altered a return without your consent, you should also file Form 14157-A, Return Preparer Fraud or Misconduct Affidavit. Download the forms on the IRS.gov website or order them by mail at 800-TAX-FORM (800-829-3676).

Posted on Feb 18th, 2013

by author: jblankenship.

Posted in: income tax, irs, tax preparers.
Tagged: income tax · irs · tax preparers

How to Reduce or Eliminate Windfall Elimination Provision Impact to Your Social Security Benefit

Feb 15th, 2013

2 comments

In prior articles we have discussed the Windfall Elimination Provision (WEP) which has the effect of reducing a portion of your Social Security retirement benefit if you’ve worked in a job that was not covered by Social Security which also provides a pension. This article deals with two ways that you can remove the impact of the WEP from your benefit – neither of which is simple, and neither of which can be done after you’ve retired.

The two methods are:

Add years of “substantial earnings” to your record
Take a lump sum distribution from your pension before you are eligible to receive the pension.

Adding Substantial Earnings Years

If you have the opportunity to work in a job that is covered by Social Security withholding and you have “substantial earnings” from that job, each year that you work in this SS-covered job adds to your ability to begin eliminating the WEP impact.

This is not an insignificant undertaking. Substantial earnings for 2013 is defined as $21,075 or more in earnings covered by Social Security, and this figure is adjusted annually by the Cost-of-Living increases. Plus, it doesn’t make a difference on your WEP impact until you’ve added 21 or more years of substantial covered earnings to your record.

The good news is that if you have 30 or more years of substantial earnings in a Social Security-covered job, you’ll eliminate the WEP impact altogether.

Taking a Lump Sum Distribution of Your Pension

If you don’t have enough years with substantial earnings, there is another way that you can eliminate the impact of WEP, which again isn’t an insignificant thing to do. If you have the ability to take a lump-sum distribution of your non-covered pension before you are eligible to receive the pension, you can eliminate WEP impact altogether. By doing this you’ll forfeit any future pension that you might have received from the non-covered employer.

The timing on this has to be right – if you are eligible for the pension when you take the lump sum distribution, you’ll still have WEP impact.

For example, John is a teacher in a state in which teachers are not covered by Social Security and he works there long enough to build up a pension. He decides to leave that state and go to another state where teachers are covered by Social Security. He’s young enough that he is not yet eligible for the pension in the first state. If he withdraws the entire pension from the first state and thereby forfeits all future claim to that pension, he will no longer have future WEP impact on his Social Security. That is, unless he goes back to another non-Social-Security-covered job at a later point in his life.

Important points

It’s important to note that WEP impact only occurs if the pension is considered to be the primary retirement plan. This is regardless of whether the pension is funded by the employee only, by a combination of employer and employee contributions, or solely by the employer.

If the plan is considered to be a supplemental plan (for example, as a 403(b) plan might be to a regular pension plan), then if the source of funds is solely from the employee, this plan will not produce a WEP impact. In a case like this, the primary plan would likely produce the WEP impact anyhow, unless one of the options listed above is used to eliminate the impact.

In addition, payments from optional savings plans, such as the TSP (Thrift Savings Plan) for CSRS employees, are not considered as WEP-impacting pension payments.

If there are multiple sources of pension from the non-covered employer, only the applicable pension for WEP impact is considered when calculating the maximum WEP impact. This is because WEP impact can’t be more than 1/2 of the applicable pension amount.

Posted on Feb 15th, 2013

by author: jblankenship.

Posted in: Social Security, social security retirement, wep, windfall elimination provision.
Tagged: social security benefits · WEP · Windfall Elimination Provision

Pros and Cons of the Roth 401(k)

Feb 13th, 2013

6 comments

The Roth 401(k) first became available in January 2006, is an option available for employers to provide as a part of “normal” 401(k) plans, either existing or new. The Roth provision allows the employee to choose to direct all or part of his or her salary deferrals into the 401(k) plan to a separate account, called a Designated Roth Account, or DRAC.

The DRAC account is segregated from the regular 401(k) account, because of the way the funds are treated. When you direct a portion of your salary into a DRAC, you pay tax on the deferred salary just the same as if you had received it in cash. This deferred salary is subject to ordinary income tax, Medicare withholding, and Social Security withholding if applicable.

The unique thing about your DRAC funds is that, upon withdrawal for a qualified purpose (e.g., after you have reached age 59½, among other purposes) the growth that has occurred in the account is not subject to tax. If this sounds familiar, it’s because this is the same type of tax treatment that is applied to a Roth IRA. Conversely, the regular 401(k) growth and contributions are subject to ordinary income tax upon withdrawal – just the same as a regular (non-Roth) IRA.

Pros of a Roth 401(k)

Among the positive aspects of a Roth 401(k) versus a regular 401(k) are:

Future taxation is eliminated (for qualified purposes). Growth and contributions are tax-free when withdrawn after age 59½.
Concerns over future tax rates are eliminated since you’ve already paid the tax on your contributions. If the future tax rates are greater you’d pay the higher rates on regular 401(k) distributions – no tax is due on qualified Roth 401(k) distributions.
Contributions could be withdrawn tax-free, with restrictions, prior to age 59½ – after you have left the employer.
Early distribution options for education, home down payment, or medical expenses are not available for a DRAC as they are from a regular 401(k).

Benefits of a Roth 401(k) versus a Roth IRA:

Higher contribution amounts for the Roth 401(k) – up to $23,000 in 2013, versus $6,500 for a Roth IRA (catch-up contributions have been included, the maximums are $17,500 and $5,500 if under age 50).
Employer matching contributions are available, although these must be directed to a “regular” 401(k) account, not the DRAC.
Income restrictions that are applied to Roth IRA contributions are more-or-less eliminated with the DRAC.
Contributions can be made to the account after reaching age 70½ if still employed and not a 5% or greater owner of the employer.
Loans may be available against the balance in the Roth 401(k) account while still employed, if allowed by the plan administrator.

Cons of a Roth 401(k)

Negative aspects of a Roth 401(k) compared to a regular 401(k):

You must pay tax on the salary deferred into the DRAC, whereas deferrals to a regular 401(k) are not subject to ordinary income tax.
If tax rates are lower for you in retirement, you have paid a higher rate on the contributions to the account, although the growth is still tax free for qualified withdrawals.

When comparing a Roth 401(k) to a Roth IRA, the following downsides are evident:

Upon reaching age 70½ your DRAC account will be subject to Required Minimum Distributions, just like a regular 401(k) or IRA. This can be mitigated by rolling over the Roth 401(k) to a Roth IRA upon leaving the employer.
You can’t access the contributions to the DRAC before you leave employment, while you can always have access to the contributions to a Roth IRA account.

Decision-point

The decision of whether to participate in a Roth 401(k) if your employer provides one is primarily the same as the decision-point of contributing to a Roth IRA versus a regular IRA. Actually, the decision between the two types of IRA is a bit more complicated due to restrictions on income levels and deductibility, which don’t apply here. The primary questions that need to be asked are:

Can you afford the tax on the maximum contribution to a Roth 401(k) account?
Do you think the tax rates will be higher or lower when you reach retirement age?

Affordability

If you can’t afford to pay the additional tax on the deferred salary (as compared to when you place the money in a regular 401(k)), then it would probably be better to choose the regular 401(k).

For example, if you’re in the 25% tax bracket deferring the maximum $23,000 into a regular 401(k) will reduce your taxes by $5,750 – and so if you chose the DRAC instead, you’d have to pay that much more in tax. If this kind of additional tax will have a negative impact on being able to pay your day-to-day expenses, the Roth 401(k) is probably not a good option for you.

Keep in mind that the decision isn’t all-or-nothing: you could choose to direct a portion of your deferral to Roth 401(k) and the remainder to the regular 401(k), which would allow you to manage the amount of extra tax that you pay.

Future Tax Rates

If you believe that the future tax rates will be greater than they are for you now, it will be to your advantage to use the Roth 401(k) – so that you pay tax at the lower rate now and avoid the future higher rate. On the other hand, if you believe that the rates will be lower for you in the future, deferring tax on regular (non-Roth) 401(k) contributions will be more to your advantage.

Posted on Feb 13th, 2013

by author: jblankenship.

6 comments already - add to the conversation!

Posted in: 401 k, IRA, qualified retirement plan, Roth 401(k), Roth IRA.
Tagged: 401k · IRA · qrp · roth 401 k

How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)

Feb 6th, 2013

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When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA). This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time.

How does this work, and how can it be advantageous?

Dollar-Cost-Averaging

When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly. Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time. Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares.

Note: DCA can be used with any type of investment account, including a 401(k), 403(b), IRA, or even a non-tax-deferred investment account. We’ll refer to 401(k) accounts throughout the article since this is one of the more common accounts where DCA is employed.

For example, let’s say that you defer $100 every two weeks into your 401(k) plan, and your investment is an index fund. For the first pay period the price of the fund is $10. When you make your deferral and purchase this time, your $100 purchases 10 shares.

Then, in the next pay period the price of the shares of your index fund has increased to $10.50. Now your $100 purchases 9.5238 shares, and you have a total of 19.5238 shares, at a price of $10.50 per share, for a total account value of $205.

On the following pay period the price of your index fund has fallen to $9.50 per share. Your $100 deferred will purchase 10.5263 shares of the fund – you now have a total of 30.0501 shares at a price of $9.50, with a total account value of $285.48.

The table below plays out purchases with random amounts over a year and then tallies the result:

Pay Period	Amount Deferred	Price Per Share	Shares Purchased	Total Shares	Total Value
1	$100	$10.55	9.4787	9.4787	$100.00
2	$100	$10.44	9.5785	19.0572	$198.96
3	$100	$9.92	10.0806	29.1378	$289.05
4	$100	$10.33	9.6805	38.8183	$400.99
5	$100	$11.95	8.3682	47.1865	$563.88
6	$100	$11.36	8.8028	55.9893	$636.04
7	$100	$9.14	10.9409	66.9302	$611.74
8	$100	$9.54	10.4822	77.4124	$738.51
9	$100	$11.67	8.569	85.9814	$1003.40
10	$100	$9.76	10.2459	96.2273	$939.18
11	$100	$10.46	9.5602	105.7875	$1106.54
12	$100	$9.62	10.395	116.1825	$1117.68
13	$100	$10.23	9.7752	125.9577	$1288.55
14	$100	$10.70	9.3458	135.3035	$1447.75
15	$100	$10.40	9.6154	144.9189	$1507.16
16	$100	$11.52	8.6806	153.5995	$1769.47
17	$100	$11.37	8.7951	162.3946	$1846.43
18	$100	$10.91	9.1659	171.5605	$1871.73
19	$100	$11.55	8.658	180.2185	$2081.52
20	$100	$10.37	9.6432	189.8617	$1968.87
21	$100	$10.19	9.8135	199.6752	$2034.69
22	$100	$9.98	10.02	209.6952	$2092.76
23	$100	$11.89	8.4104	218.1056	$2593.28
24	$100	$11.82	8.4602	226.5658	$2678.01
25	$100	$10.33	9.6805	236.2463	$2440.42
26	$100	$11.41	8.7642	245.0105	$2795.57

The table above was created by generating random prices between $9 and $11.99 over the 26 periods. In real life, your investment wouldn’t likely have such wildly-fluctuating values during the course of 26 pay periods – I used this degree of fluctuation to demonstrate the benefit of DCA when the investment is relatively volatile.

The Advantage

If, instead of investing $100 every two weeks you saved up the entire $2600 and invested it at the end of the 26th pay period, you would be purchasing all of the shares at $11.41, for a total of 227.8703 shares. By DCA, your $2600 has increased in value such that you hold 245.0105 shares, with a value of $2795.57 – a net benefit of $195.57.

On the other hand, if you had $2600 to invest at the beginning of the table when the price was $10.55 per share, you would have purchased a total of 246.4455 shares, which would be worth a total of $2811.94 at the end of the 26 periods.

You can see from the table that by Dollar-Cost-Averaging, you achieve an average price per share over the period that is beneficial to you – since you’re purchasing exactly the same dollar amount of shares every time. When the price is high, you buy fewer shares, and when the price is low you buy more shares. By doing this over a long period of time, such as 30 years, you will avoid the risk associated with saving up a large sum of money and (perhaps) purchasing shares in an investment at a relatively high price by comparison over the savings period.

Posted on Feb 6th, 2013

by author: jblankenship.

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

IRAs and Medicaid

Feb 1st, 2013

by sraskie.

4 comments

When it comes to IRAs and Medicaid eligibility the question that gets asked is, “How does my IRA affect my eligibility for Medicaid?”

Many states share similar guidelines when it comes to exempt and non-exempt assets in IRAs. Essentially, it boils down to this: if the IRA is not in payout status (the IRA owner is not taking required minimum distributions) then the assets in the IRA are included (non-exempt) in the determination of eligibility. However, if the IRA is in payout status and the owner is now taking required minimum distributions (RMDs) the total amount of the IRA is not included, but the annual income from the RMDs is.The same would be true regarding 401(k)s, 403(b), and other qualified plans that may require RMDs after age 70 ½.

There are some states (Illinois for example) that treat IRAs, a 401(k), and pensions as exempt. Check your state’s laws to see where you fit in.

Another asset that works similarly is an annuity. Like the IRA, if an individual owns and annuity and it is not in payout status (it hasn’t been annuitized), the entire account balance is deemed non-exempt and it is considered an includible asset. If the annuity has been annuitized and is now rendering a steady stream of guaranteed payments, then the annuity balance is not included, but the annual income from the annuity payments is.

Posted on Feb 1st, 2013

by author: sraskie.

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Posted in: 401 k, 401 k 403 b, 401k, 403 b, health insurance, IRA, ira account, ira funds, ira money, iras, Medicare, medicare, qrp, qualified retirement plan, retirement accounts, Roth IRA, roth ira, traditional ira.

Defined Contribution vs. Defined Benefit Plans

Jan 28th, 2013

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Many employers have made retirement plans available for their employees, and sometimes there are multiple types of plans that the employee can participate in. These retirement plans fall into two categories: Defined Contribution and Defined Benefit plans. In this article we’ll cover the differences between the two types of plans.

Defined Benefit (DB) Plans

The older type of retirement plan is the Defined Benefit Plan. (We’ll refer to this as DB for the rest of the article.) DB plans are generally the old standard pension-type of plan, and this category of plan is named as it is because the benefit is a defined amount in a pension plan.

By a defined amount, we mean that a formula is used to calculate the amount of pension that you’ll receive. The formula typically uses factors such as your years of employment, your average salary (either over your entire career, or perhaps over the most recent five years, as an example), your age when you begin receiving the pension payments, and other factors.

Let’s look at an example. Your final five years of salary averaged $50,000 per year and you had 25 years of service with the company. Your defined benefit calculation might be something like 2% per year of service times the average salary during your final five years, or 50% of $50,000 – for a pension of $25,000. Pension calculations can be very complicated, this was a very simple example. A few of the variances include:

a flat amount formula unrelated to years of service or earnings;
a flat percentage of earnings, unrelated to years of service;
a flat amount per year of service, unrelated to earnings; or
a percentage of earnings per year of service, reflecting both earnings and service.

Once the amount of your pension is defined, you will know how much benefit you’ll receive when you begin receiving it – and it’s a guarantee. It is for this reason that DB plans are often considered to be more valuable than Defined Contribution (DC) plans. As you’ll see in the next section, DC plans don’t have such a guarantee.

This guaranteed benefit comes at the cost of the employer. Since the employer must provide that specific benefit, variables such as the rate of return on investments, inflation, and the like, can have a negative affect on the funds available to pay the benefit. This can cause the employer to have to purchase insurance products that will account for those variables, which can be quite costly.

Defined Contribution (DC) Plans

This type of retirement plan is the newer of the two types, but it’s also the one that requires more participation from the employee. The DC plan is generally a savings plan, such as a 401(k) plan, and the employee and employer make contributions to the account. The amounts that can be contributed to the plan are limited by IRS definitions, and that’s the reason that these plans are called Defined Contributions – since the Contribution amount is defined.

There are a couple of types of DC plans – profit-sharing plans and stock bonus plans. These can also be mixed together to create a hybrid DC plan. The profit-sharing type of plan is where the profits of the business are shared among the employees in cash, where the stock bonus plan is a distribution of company stock to the employees.

Since the contribution is the amount that is defined in a DC plan (rather than the benefit, as in DB plans), the benefit that the employee will receive during retirement is not known. The amount that the employee may receive during retirement is based completely on the following factors:

How much the employee and employer contribute to the plan;
What rate of return the plan experiences; and
How long the funds are allowed to grow in the plan.

The amount that the employee contributes to the plan is totally up to the employee – these plans are voluntary in nature. Contributing more to the plan is the primary thing that you can change to improve your chances of increasing the amount of funds that your plan will eventually have upon your retirement.

Rates of return are completely variable – this depends solely on what happens with the various investment choices that you use for investing your DC account. If the investments you choose increase in value over time (which we hope that they would) then you’ll see your investment nest egg increase in value. Sometimes you’ll see the investments go up in value, sometimes the investments will go down.

This is the same for both DB and DC plans – but in the case of the DC plan you’re not guaranteed a specific benefit, so reductions to your investments are borne solely by you, the account holder. On the other hand, if there is a reduction experienced by the investments in a DB plan, the employer (or the insurance company that owns the pension annuity) must make up the difference to ensure that you receive the benefit that has been defined for you.

Comparison

Below is a table which compares the two types of plans:

	Defined Benefit	Defined Contribution
Cost variability and Risk	Borne by the employer	Borne solely by the employee
Funding	Employer	Employer and employee
Most Beneficial to	Longer-term employees; encourages longer tenure as benefits are often increased by years of service	Shorter-term employees; may encourage changing jobs to provide access to the account’s funds.
Cost to Employer	Higher cost due to variances in returns	Lowest costs; administrative costs only
Access to Account	Generally not accessible pre-retirement	Loans may be available, as well as inservice distributions after a specific age
Tax Benefit	Employer only	Employer and employee both receive tax benefits

Posted on Jan 28th, 2013

by author: jblankenship.

1 comment already - add to the conversation!

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

Why Hire a Professional?

Jan 28th, 2013

by sraskie.

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Throughout our lives as different life events happen and the need for help arises we have the opportunity to rely on ourselves to get the tasks done, or entrust in the skill and expertise of a professional. Very often there’s a fine line as to what we’ll bother doing ourselves or to whom we’ll hire and delegate the job. For mundane tasks, the tasks that we know we can do ourselves with little to no effort, it’s second nature for us to roll up our sleeves and get the job done. Examples of this include washing the car, cleaning the house, balancing the checkbook, bandaging a small cut, and doing the dishes. It’s rare that we’ll “contract out” these tasks as they are very limited in the expertise needed to get them done, and from a frugality standpoint, most of us are willing to accept the trade-off of doing the work and allocating the money that would have been spent elsewhere.

For the not so mundane or more labor intensive, or perhaps mentally intensive tasks we may choose to again do the work ourselves or hire a professional. Often these decisions are determined by how long the project will take, resources available, and how much time we have to commit to the project. Examples of this include automobile maintenance, home repairs, treating a sprained an ankle, and income tax preparation. The decision here boils down to time, money and what we think we know about the job.

Finally, there are the tasks where we seek out the help of a professional. This includes, but isn’t limited to hiring an attorney to make a will, trust or help with a divorce, going to the doctor for an ailment or immediate issue such as a broken bone, infection, or immunizations, hiring a real estate agent to walk you through the buying or selling of a home, or working with a financial planner to guide you on your investments, financial plan or other money matters.

Now, there are some people who will argue with me and say that some of these tasks and professions can be done without the help of a professional. I disagree. Granted there are plenty of do-it-yourself places for wills, trusts, investing, and medical care. But caveat emptor – buyer beware!

Some of these reasons why people will justify or rationalize doing it themselves would be to save money, trust issues or the fact that they think they can do the job just as well if not better than the professional. Some may get lucky, but many unknowingly choose a different fate. The reason I say unknowingly is due to the fact that they make the choices and often don’t realize the consequences until much later. Take for example the person that does their will online. They may not realize until much later (in the case of their death they won’t realize at all, but their kids will) that they made a mistake or the will wasn’t according to their state’s laws.

In a divorce, they might not realize that the settlement they got should have been much bigger or smaller than what they received or paid. In our business of financial planning, we’ve seen too many do-it-yourselfers try to play the stock market game by actively trading, watching cable news, and reading money magazines. I mean, if 10,000 Wall Street analysts can’t figure it out, these amateurs surely have an edge (I am of course being grossly sarcastic).

They key word to look at here is professional. What does it take to be one and what should we as consumers look for? Here are some basics to look for:

Education – are they qualified and educated in their field? What degrees and designations do they hold?
Tenure – how long have they been practicing?
Licensing – are there state or federal standards needed for them to be in their profession?
What don’t they know? – are they willing to admit when they aren’t qualified to help? Look at it this way, a general practitioner isn’t going to give you brain surgery. You’ll need a brain surgeon. Both are doctors, but both have very different professions and clients. Likewise, an estate attorney and a criminal attorney are both lawyers, but both have different expertise. Avoid people who claim to know everything.
Code of ethics – do they adhere to one?
Transparency – do you understand what they’re doing for you, how they’re doing it, and how they are getting paid?

This list isn’t the end all be all, but it can be a good place to start. The main point being is that when you hire a professional you’re hiring them for their expertise, experience and professional judgment. In your eyes, it’s worth it to you to delegate the job needed to be done, in exchange for your time and money. You’re willing to admit that you don’t know everything (a wise move, but admittedly hard to do) and are willing to trust a professional to guide you. In the long run, a professional will potentially save you, if not make you money depending on the job he or she is doing. They’ll be focused on your long-term well-being and committed to building a relationship with you. They’ll be open to your questions and may even ask you some thought-provoking questions as well.

In the end, working with a professional should ultimately allow you to delegate a task that you feel you’re unable to handle and ultimately will save you money in the long run by avoiding mistakes and saving you time and energy. Your homework is to find a true professional.

Posted on Jan 28th, 2013

by author: sraskie.

Posted in: fee-only, fiduciary, financial planning, saving.

Earnings Tests Apply to Spousal and Survivor Social Security Benefits As Well

Jan 25th, 2013

1 comment

If you’re receiving Spousal or Survivor Social Security benefits and you’re under Full Retirement Age, you need to know that any earnings that you have can have an impact on the benefits that you’re receiving. These are the same limits that apply to regular retirement Social Security benefits, and they apply in the same manner.

For 2013, if you will not reach Full Retirement Age during this calendar year, the earnings limit is $15,120, or $1,260 per month. For every $2 over that limit that you earn for the year, your Social Security benefit will be reduced by $1. For example, if you earned $20,000 for the year, you are over the limit by $4,880, and you’ll lose $2,440 of your benefit.

If you will reach Full Retirement Age in 2013, the earnings limit is $40,080, or $3,340 per month – and the treatment is different. In this case, for every $3 that you earn over this limit (the monthly limit), you’ll forego $1 in Social Security benefits.

In both cases, if you have earnings above the limit and some of your expected benefit is withheld, you will receive credit for those months of withheld benefits when you reach Full Retirement Age, and your Social Security benefit will be adjusted upward. Once you reach Full Retirement Age there is no limit on the amount of earnings that you can have – your benefit will not be reduced due to your continued employment after this age.

Posted on Jan 25th, 2013

by author: jblankenship.

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Posted in: 2013 tax year, Early Filing, early retirement, Earnings Limits, Social Security, Social Security spousal benefit, social security survivor benefits.
Tagged: Social Security · social security spousal benefits · social security survivor benefits · spousal benefit · survivor benefits

What is a 401(k)?

Jan 23rd, 2013

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retirement Many of us have access to a 401(k) plan at our workplace – have you ever wondered exactly what a 401(k) is?

The 401(k) plan is named for a specific section in the Internal Revenue Code – Section 401, subsection k, to be exact. This code section lays out the rules for these retirement plans, which are employer-sponsored plans providing a method for the worker or employee to defer a certain amount of income into a savings plan on a pre-tax basis.

Often the employer also includes a matching contribution to the employee’s account. These matches are typically based upon the amount of contribution that the employee makes to the plan – such as a dollar-for-dollar match for contributions made by the employee up to certain percentage of the employee’s income. The deferred income is not subject to ordinary income tax, but it is still subject to FICA (Social Security) and Medicare taxes. The employer match is not subject to any of these taxes.

The income that the employee voluntarily defers into the 401(k) plan is immediately vested with the employee, meaning that the contributions that the employee makes belongs exclusively to the employee. Employer-matching funds are usually subject to a schedule for vesting. An example would be that the employee must remain employed for a specific period of time (say, five years) before the employer-matching funds are vested with the employee. Leaving employment prior to meeting that vesting schedule could result in the employee relinquishing a portion or all of the employer-matching funds in the account.

The income that is diverted into the 401(k) plan can be allocated to a variety of investment choices. The choices are generally limited to a defined group of stocks and mutual funds by the plan administrator. Lately many plans also offer an option to use a regular brokerage account to provide investment in virtually any domestic holding.

Restrictions

In addition to the restricted group of investments that you may have available to choose from, there are many other restrictions on your 401(k) account. For example, once you divert your income into a 401(k) plan, you generally cannot withdraw the funds from the account while you’re still employed with that employer. Some plans do have in-service distributions available after the employee has reached a particular age (generally 59½), but this is relatively rare.

After you leave employment you have the option of withdrawing the funds from the account. There are a few ways that this can be done –

A direct rollover to another retirement plan (another 401(k) or an IRA), which is a non-taxable event; or
A cash distribution to you, which will be subject to a mandatory 20% withholding, since this is potentially a taxable event (even if you rollover the distribution to another plan within 60 days); or
A distribution of the securities that you own in the plan. Part of this distribution may be taxable (see this article on NUA, Net Unrealized Appreciation, for more details). The portion of the distribution that is taxable will be subject to the mandatory 20% withholding mentioned above.

If any of these distributions occurs before you reach age 59½ you may be subject to an early distribution penalty of 10% unless you meet one of the exceptions, which includes purchase of a first home and payment of certain medical expenses, among other exceptions.

Loans can be available to access the funds in your account while still employed. The loans are limited to 50% of your total vested account balance, with a maximum loan amount of $50,000. The loan must be paid back over the course of five years, at a prescribed rate of interest. If you leave employment while your loan is still outstanding (at whatever amount), the loan must be paid back immediately, either from outside funds or from funds in the 401(k) account. If the funds are paid back from within the 401(k), what happens is that you will be considered to have withdrawn the amount of the loan from the account, and the withdrawal will be subject to ordinary income tax and possibly a penalty if you are under age 59½ at the time you leave employment.

Contribution Limits

There are certain limits to the amount of contributions (income deferrals) that can be made into a 401(k) account. For 2013, the annual limit for deferral of income is $17,500. There is an additional “catch-up” contribution amount that folks over age 50 can make – up to $5,500.

There is also a maximum amount that can be contributed in total – including the employer match. For 2013 this limit is $51,000, or $56,500 when the catch-up contribution is used.

All of these limits are based upon the employee’s salary, as well. If the employee’s salary is less than the annual maximum contribution limit, then the contributions are limited to 100% of the employee’s salary for the year.

Roth 401(k)

Briefly, there is another type of account that can be included in an employer’s 401(k) plan: the Roth 401(k), which is also known as a Designated Roth Account, or DRAC. The DRAC allows the employee to divert income into the account on an after-tax basis – meaning that money contributed to the DRAC is taxed as if the employee received it in cash. The funds in the DRAC account are subject to the same limitations of withdrawal (while employed) as the “regular” 401(k) account. In return for the pre-payment of tax on these restricted funds, when the employee leaves employment he or she can access these funds tax-free once the employee reaches age 59½.

Wrap up

This article was not intended to cover every nuance of 401(k) plans; rather, it was intended to provide a brief overview of this important part of your retirement plan. We’ll cover more specifics on the 401(k) plan in future articles.

Posted on Jan 23rd, 2013

by author: jblankenship.

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

IRS Announces A New Home Office Deduction Option for Tax Year 2013

Jan 21st, 2013

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For folks who work out of their homes, including home-based businesses and telecommuters among others, there is a new alternative available starting with the 2013 tax year for claiming the Home Office Deduction. This new method saves a lot of extra recordkeeping and simplifies the filing process considerably.

In the past (including tax year 2012 which you’ll file by April 15, 2013), to take the home office deduction you are required to fill out Form 8829, Expenses for Business Use of Your Home. This form requires you to compile all of your expenses for your home and then allocate those expenses to the portion of your home that is used “regularly and exclusively” for business purposes.

IMPORTANT NOTE: For your 2012 tax return (which you’re filing in 2013) you must use Form 8829 as usual. The new method will be available on your 2013 tax return which you’ll file in 2014.

The new option provides a flat rate of $5 per square foot of the portion of your home; there is a $1,500 limit, and limited by the income derived from the business (along with your other business expenses). All of your other expenses relating to the business are still deductible – such as supplies, wages, business cards, etc..

Using the new option eliminates the depreciation of your home, and your allowable mortgage interest, real estate taxes, and casualty losses can still be deducted as itemized deductions on your Schedule A.

It’s important to note that the requirement that the portion of the home dedicated to the business use must be used regularly and exclusively for the business purpose. For more information on the definition of “regular and exclusive use”, see IRS Publication 587, Business Use of Your Home.

Posted on Jan 21st, 2013

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, income tax, itemized deduction.
Tagged: income tax · irs · itemized deduction

Why Designations Matter

Jan 18th, 2013

by sraskie.

2 comments

Throughout my career I have had the occasion to talk with several financial advisors, planners, insurance agents, brokers, and other industry professionals about some of the reasons why people choose to pursue or not to pursue designations. I have heard differing views on the topic and thought I’d share some of my insights as to why I chose and still choose to pursue designations and degrees.

Before I do, let me start by talking about some of the reasons why the advisors I have spoken to decide not to earn a designation. More often than not, the typical answers that I receive are not having enough time, not sure which designation to pursue, lack of funding to afford the designation, and lack of support on earning the designation – either from their employer or family. On the latter two points, some companies may not be able to “support” the designation – think captive agents that get the CFP® or ChFC® designation. They may be allowed to earn it, but if they are captive agents to a specific company, meaning that they have to be loyal to the company first, they are not allowed to advertise it, put it on business cards or stationery, and most importantly are not allowed to act as a fiduciary – meaning that they have to put the interests of the company they work for first, then the client. This isn’t necessarily a bad thing, just different. Regarding family, many designations take a lot of time, energy and resources away from the family. Although these sacrifices are short-lived, some family members have a hard time with the time and resources being shifted momentarily.

One of the most ridiculous responses I heard came from an advisor I was having a conversation with regarding the coveted CFP® designation. Having found out that I earned it, we were discussing the finer points of what the designation means, what you have to know for the exam and so on. At the end of the conversation the advisor gave me a slap on the back and said, “I already make enough money and don’t need the designation. But have fun paying all those fees!” (Side note: as of this writing the advisor I was speaking to is no longer in the industry).

In my humble opinion there are reasons why you should and why you should not pursue a designation. As you can assimilate from the information above, it becomes clear of why we should not pursue a designation. It’s not for the “money” and it’s certainly not for the prestige (although you feel pretty good when you earn one). You shouldn’t pursue one if you feel forced to do so (would you want to work with an advisor if you knew he or she really didn’t want the letters after their name?).

Most advisors and planners pursue and earn designations because they want to. They want to better themselves, their clients and their industry. Now, I’d be lying if I said that having designations doesn’t increase your income. It certainly can. That being said, the increase in income is (and should always be) a by-product of learning, putting your clients first, and maintaining the integrity of the industry and the designation earned.

The real beauty of earning a designation is it teaches us humility. Why? Because it’s through learning and earning those designations that we truly realize how much we really don’t know – and how much more we need to learn. This industry has so much to offer and so much of it is ever-changing. To not continue to learn, earn designations and better ourselves is a disservice to our colleagues, our profession, and our clients – and most of all, ourselves.

Posted on Jan 18th, 2013

by author: sraskie.

Posted in: education, event, fafsa, fee-only, fiduciary, financial planning, forbes.com, goals, investing, investment, newsletter, rant, rules of thumb.
Tagged: fiduciary · financial planning · investment · retirement accounts · retirement plan

APR vs. APY

Jan 14th, 2013

by sraskie.

2 comments

Question: I am thinking on saving money in a 3 year CD paying .28%. The bank brochure is telling me I’ll get .28% APR, but there’s another word in the brochure that talks about APY. What’s the difference?

Good question!

APR (Annual Percentage Rate) is what you see on the “face” of the account. Example: If I invest $1,000 in a 1 year CD that pays 5%, the 5% on the brochure at the bank means APR. So I’m led to think that I’ll make 5% ($50) for the year for a total of $1,050.

APY (Annual Percentage Yield) takes into account how often that interest rate is credited. Meaning does it credit a portion of that 5% monthly, semi-annually, or annually? If it’s annually, you’ll still get the 5% or $50.

If it’s semi-annually, you’ll get credited 2.5% every 6 months. This is a bit better since you can reinvest that interest payment ($25) for the remaining 6 months on the CD. Now, compound interest takes effect and you’re balance is at $1,025 in 6 months. That $1,025 now gets to partake in the remaining 2.5% that will evolve over the next 6 months. This adds up to be slightly more than your original $1,050 that you made for just the interest being credited for 1 year only. Being credited or compounded semi-annually leaves you with $1,050.63 at the end of 1 year.

If that $1,000 is credited (compounded) monthly you’re at $1,051.16. As you can see, the more compounding periods you have, the better. Thus the miracle of compound interest and the time value of money.

Works just the opposite against us when we borrow money.

Something to consider, although a CD will be 100% guaranteed by the FDIC, at .28% you’re not even keeping with inflation, in fact, you’re losing money. You may consider researching online banks that are FDIC insured that may offer a better yield.

Posted on Jan 14th, 2013

by author: sraskie.

Posted in: budgeting, financial aid, first time homebuyer credit.
Tagged: annual percentage · apr · apy · money · return · safe · yield

A Quick and Dirty Way to Determine Your PIA

Jan 11th, 2013

2 comments

We’ve gone over the long, painful, detailed way to calculate the Primary Insurance Amount (PIA) in many different articles and my book. The PIA is central to most of the calculations we do, such as your own benefit (reduced or increased if you file early or late), survivor benefits, and the like.

Sometimes it is difficult to actually know find out what your PIA actually is. Here’s a quick and dirty way to figure it out:

Go to the Social Security website and get your statement (www.socialsecurity.gov/mystatement). On page 2 at the top you’ll see either your Full Retirement Age (FRA) benefit amount, or the amount at your current age if you’re over FRA. Oftentimes we refer to this FRA amount as your PIA, but nearly always with a qualification. This is because the benefit amount illustrated on this statement is assuming that you continue earning at your current level between now and Full Retirement Age. What if you died today, what is your PIA today, if no more earnings went on your record?

In addition, if you’re over FRA that amount will not equal your PIA, it will be your DRC-enhanced (Delayed Retirement Credit) benefit amount. Keep reading down the page.

When you get to the part about the benefit for your surviving spouse who has reached Full Retirement Age – that’s the ticket! This amount is always equal to your current PIA, without any enhancement by future earnings. A way to double-check this figure is to take the benefit for your surviving child under age 18 and divide by .75, since a child under age 18 is due a benefit equal to 75% of the decedent-parent’s PIA. The amount should come out equal (roughly) to the surviving spouse figure.

And that’s it – now you can go off and do your calculations based on your current PIA. Keep in mind that if you’re younger than age 60 your calculations are likely to depart quite a bit from the way reality will work out.

Posted on Jan 11th, 2013

by author: jblankenship.

Posted in: Delayed Retirement Credit, DRC, PIA, primary insurance amount, Social Security.
Tagged: PIA · primary insurance amount · Social Security

History of the 401(k)

Jan 9th, 2013

11 comments

Back in 1978, the year of 3 popes, Congress passed the Revenue Act of 1978 which included a provision that became Internal Revenue Code section 401(k).

The 401(k) has roots going back several decades earlier, with many different rulings (Hicks v. US, Revenue Ruling 56-497, and Revenue Ruling 63-180, among others), providing the groundwork for the specialized tax treatment of salary deferrals that Section 401(k) enabled.

More groundwork for the 401(k) as we know it was laid with the passage of the Employee Retirement Income Security Act (ERISA) of 1974, in that the Treasury Department was restricted from putting forth a particular set of regulations that would have reduced or eliminated the tax-deferral benefits of deferred compensation plans. After the Treasury Department withdrew the proposed regulations in 1978, the way was cleared to introduce the 401(k) plan with the Revenue Act.

This particular section of the Code enabled profit-sharing plans to adopt “cash or deferred arrangements”, or CODAs, funded via pre-tax salary deferral contributions. When the 401(k) code section became effective in January 1980, and the IRS proposed the regulations for Section 401(k) in late 1981, the idea came forth to replace existing bonus arrangements with the new tax-deferred alternative. The real “kicker” that caused the 401(k) plan to garner interest by employers was the ability to save on taxes while still maintaining competitiveness with the earlier bonus plans – and the employer matching arrangement of 401(k) plans did just that.

Several large corporations very quickly began replacing after-tax thrift plans with the new 401(k) plan, and adding 401(k) options to existing profit-sharing and stock bonus plans. The new 401(k)-type of plan provided the employee with deferred taxation on funds diverted into the plans, and provided the employers with the ability to make significant matching contributions on a tax-favored basis.

In 1984, the Tax Reform Act of ‘84 enacted rules for “non-discrimination” testing in the 401(k) plans – meaning that highly-compensated employees couldn’t receive benefit from the plans if non-highly-compensated employees weren’t participating in the plans to an allowable degree.

Then the 1986 Tax Reform Act further tightened the non-discrimination restrictions and set the maximum annual allowable amount of deferral of compensation by employees at $7,000. Up to this point, there was only an annual limit on all contributions by both the employer and employee, which was set at $30,000 from 1982 through 2003. These amounts have gradually increased to today’s levels, of $17,500 for regular deferral by employees and a total annual limit of $51,000.

The 20% mandatory withholding requirement for distributions from 401(k) plans was added with the 1992 Unemployment Compensation Amendments. This requirement applies to distributions that are not rolled over into another retirement plan.

In 1996, the passage of the Small Business Job Protection Act provided an additional boost to participation in 401(k) plans with the release of limits on the contributions that could be made to a retirement plan by an employee that is also participating in a regular pension, or defined benefit, plan.

One more piece of legislation that had a great impact on 401(k) plans was the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), which bumped up the annual maximum contribution by employers and employees (it had been frozen at $30,000 since 1987), as well as adding the “catch-up” contribution provision. The catch-up contribution provision allows participants who are age 50 or older an additional amount to defer into 401(k) plans annually, not limited by the annual maximum contribution amount. This was set at $3,000 initially and has been indexed by COLA to the 2013 limit of $5,500.

EGTRRA also introduced the Roth 401(k) feature, which allows participants to elect a designated separate account within the 401(k) plan that accepts salary deferrals on an after-tax basis, and then provides for a Roth-IRA-type of treatment for qualified distributions.

After EGTRRA, the Pension Protection Act of 2006 came along, which made permanent the provisions of EGTRRA (originally these were set to expire in 2010), as well as providing methods for employers to automatically enroll employees in the plans and choose default investments. The purpose of these provisions was to bolster participation in 401(k) plans and facilitate the best used of these plans.

Most recently, the 2013 American Taxpayer Relief Act (ATRA) provided a method for converting “regular” 401(k) account funds to Roth 401(k) accounts – previously, a participant in a 401(k) plan could only convert funds from a regular account to a Roth account if he or she was in a position to otherwise distributed funds from the account. Generally this means that the employee/participant has left the job associated with the 401(k) or has reached a retirement age set by the plan administrator. With the new rules provided by ATRA, these conversions could be undertaken by a currently-employed participant of any age.

Posted on Jan 9th, 2013

by author: jblankenship.

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Posted in: 2013 tax year, 401 k, contribution limit, qrp, qualified retirement plan, Roth 401(k), Roth Conversion.
Tagged: 2013 tax year · 401k · contribution limit · qrp · qualified retirement plan

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