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

Posted in: #noTOP, 2012 tax year, 2013 tax year, income tax, income tax credit, tax credits.
Tagged: adoption · income tax · tax credit

Restricted Application is Available via the Online Application

Mar 15th, 2013

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I learn something new almost every day.

Today (well, not today but recently), I learned something about the online application for Social Security that I didn’t know: the restricted application for Spousal Benefits is available as a choice when you apply using the online application system! (If you want more information on why a restricted application is important, see this article about Leaving Money on the Table.)

For quite a while now I’ve been telling folks that the best way to apply for the restricted application is to go to your local office. When you get there and explain that you want to submit a restricted application for Spousal Benefits only, the first person that you talk to will likely tell you that you can’t do this, because your own retirement benefit is greater than half of your spouse’s PIA, or something like that. Then my advice has been to ask for a supervisor and explain it again, and keep insisting that you’re eligible to do this (make sure that you are, first of course!), until you get the right person to agree with you.

As it turns out, for some time now you’ve been able to select this option via that online application. See below – this is a screenshot of the application system (sorry it’s not very legible). The last part in bold says:

If you are eligible for both retirement benefits and spouse’s benefits, do you want to delay receipt of retirement benefits?

It’s clear that this option gives you the ability to delay the receipt of your retirement benefit and only receive the spouse’s benefit, assuming that you’re at least at Full Retirement Age and your spouse has applied for his or her benefit.

This is great news – since now you won’t have to go through the hassle described above in order to submit a restricted application for spousal benefits.

An additional, likely unintended positive to this development is that you could use this blog to show the first person you talk to (if you still opt to visit the local office) in order to help prove your eligibility for this option.

Posted on Mar 15th, 2013

by author: jblankenship.

Posted in: #noTOP, restricted application, Social Security, social security administration, social security benefits, Social Security spousal benefit, Spousal Benefit.
Tagged: restricted application · Social Security · social security benefits · spousal benefit

Your Employer’s Retirement Plan

Mar 13th, 2013

by sraskie.

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Whether you work as a doctor, teacher, office administrator, attorney, or government employee chances are you have access to your employer’s retirement plan such as a 401(k), 403(b), 457, SEP, or SIMPLE. These plans are a great resource to save money into, and some employers will even pay you to participate!

Let’s start with the 401(k). A 401(k) is a savings plan that is started by your employer to encourage both owners of the business and employees to save for retirement. Depending on how much you want to save, you can choose to have a specific dollar amount or percentage of your gross pay directed to your 401(k) account. Your money in your account can be invested tax-deferred in stock or bond mutual funds, company stock (if you work for a publicly traded company), or even a money market account. Your choice of funds will depend on the company that offers the 401(k) through your employer. Generally, you’re going to want to choose funds with low fees and expenses. As of 2013, the maximum amount you can put into your 401(k) is $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

A cousin to the 401(k) is the 403(b). The 403(b) is very similar to the 401(k) in that you’re allowed to allocate a certain amount or percentage of your gross pay to your account, tax-deferred. Where the 403(b) differs is that it’s only allowed for non-profits such as school districts, hospitals, municipalities, and qualified charitable organizations. Another difference is by law the money in your 403(b) can only be invested in mutual funds or annuity contracts. You’re not allowed to own individual stocks or bonds in it. Like the 401(k), you’re allowed to save (as of 2013) $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older. At age 59 ½ qualified withdrawals are now taxed as ordinary income. Withdrawals before age 59 ½ are subject to penalties with some exceptions.

Branching out in our retirement plan family tree we come to the 457 plan. 457 plans are reserved for certain non-profits such as hospitals, government entities, school districts and colleges and universities. As you may have guessed, 457 plans are similar to their 401(k) and 403(b) counterparts in that money from your gross pay goes into your account tax-deferred. Like the 403(b) the 457 only allows investments in mutual funds or annuity contracts.

Similar to the 401(k) and 403(b), you’re allowed to save up to $17,500 annually and another $5,500 “catch-up” contribution if you’re age 50 or older (for 2013). Unlike the 401(k) and 403(b) the 457 allows you access to your money at any age, as long as you’re separated from service from your employer. For example, if you were 40 years old and have been saving into a 457 since you were age 25 and you saved $50,000 and you were fired, laid off or resigned, you’d have access to your 457 money without penalty; you’d simply pay ordinary income tax on any withdrawals.

Another key point to make is in regards to the aggregation rule. What this means is that you’re only allowed to invest $17,500 (along with the “catch-up” if you qualify) total between a 401(k) and a 403(b). For example, you work as a professor for nine months of the year and save $14,000 in your college’s 403(b). Over the summer, you work part time for a company that offers a 401(k) plan and you want to save money there. Assuming you’re age 40, you’d only be able to save an additional $3,500 to your summer company’s 401(k) – for a total of $17,500.

There is one exception to the aggregation rule. If you have access to a 401(k) or 403(b) and a 457, you are allowed to contribute the maximum to the 401(k) or 403(b) – for a total of $17,500 and then contribute the maximum to the 457 for an annual total of $35,000. The 457 trumps the aggregation rule. Few people may be able to actually sock away $35,000 per year, but it is available to those that work for employers offering both plans or if you work for two or more employers and they offer one or the other.

SEPs and SIMPLEs work a bit different. Typically these plans are available to smaller employers and SEPs are common for those that are self-employed. Both SEPs and SIMPLEs use IRAs as the funding vehicle to place retirement money, but each has different requirements as to contribution limits and participation requirements.

SEPs (Simplified Employee Pensions) can be funded to a maximum of $51,000 annually (for 2013) or 25% of the employee’s salary – whichever is smaller. There can be corresponding tax deductions involved that may be beneficial for solo businesses or businesses with a small number of employees as there are requirements that all employees must participate.

SIMPLEs (Savings Incentive Match PLan for Employees) are another option for smaller businesses looking to start a retirement plan and looking for a cost effective way to start (a 401(k) can be administratively expensive). Essentially, both employer and employees are allowed to participate and certain rules dictate that the employer must make a matching contribution (hence the Match in the name) to participating employees. As of 2013 you can contribute a maximum of $12,000 annually to a SIMPLE plan with an additional “catch-up” contribution of $2,500 if you’re age 50 or older.

The aggregation rule that applies to the 401(k) and 403(b) also applies to SEPs and SIMPLEs. This means that of the four plans for 2013, you’re still only allowed a total contribution of $17,500 annually ($23,000 if you’re age 50 or over). Having a 457 would be the only way to increase this amount.

Like SEPs and SIMPLEs, some 401(k) and 403(b) plans also have the company match. This means that in addition to your contributions, your employer will also make a contribution or “match” to the amount you’re contributing up to a certain percent. Consider taking full advantage of this. It’s free money! There are several reasons why an employer would do this ranging from plan compliance to helping ensure employee satisfaction and loyalty.

Finally, participating in your employer’s plan does not prohibit you from participating in a Traditional or Roth IRA. You are allowed to contribute the maximum allowed by law to both your employer’s plan and your own IRA.

It goes without saying that before you decide to participate, talk with your human resources department (not your cubicle buddy) or a financial professional regarding your options and which option or combination is right for you.

Posted on Mar 13th, 2013

by author: sraskie.

Posted in: 401 k, 401 k 403 b, 401k, 403 b, 457, employer plan, investing, investment, qualified retirement plan, retirement, retirement accounts, retirement benefits, retirement plan, retirement plans, retirement savings, retirement savings plans, SEP IRA, SIMPLE.

Book Review: Currencies After the Crash

Mar 11th, 2013

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You Alone amongst all the Thousands....... m...

This book is a series of nine essays about the state of currency in our global economy after the 2008-2009 economic crisis. The contributor list is impressive: global currency luminaries such as Anoop Singh of the IMF, Robert Johnson of the Global Finance Project, Jörg Asmussen of the European Central Bank, and many others of similar pedigree. The book is edited by Sara Eisen of Bloomberg.

This book doesn’t lend itself well to description, other than that each of the contributors provides a snippet of insight into the global currency situation as it stands today, from his or her professional perspective.

Most of the essays point out that the US dollar is not in the crisis situation that the popular press would have us believe. Yes, the dominance of the dollar has diminished in recent years, but a replacement as dominant currency worldwide is not eminent from either the euro or the yuan, the only two contenders at this point.

That’s not to say that the dollar doesn’t have it’s problems – it’s just that the dominance of the dollar is so huge that it can’t be replaced in the very near term. And during that period the US has the opportunity to right the ship and possibly maintain the dominance of the dollar.

The euro and the European Central Bank have a slew of problems that must be addressed in order to maintain viability as an economy – including the likely paring down of the membership to eliminate some of the problem child nations such as Greece. This will likely keep the euro as a minor player on the world stage, still a major component of the western European marketplace.

The yuan’s position as a leading global currency is improving all the time, but China has to begin to evolve its own economy toward a consumer-centric one in order to get to a point where the yuan can begin to assert global dominance.

Of course the views are not in lockstep with one another, so you’ll want to read this through for yourself if you’re looking for a good overall view of the global currency marketplace.

This book may be a bit heady for many readers, as the concepts of global currencies and banking get pretty complex. I have to admit that I had a difficult time with some of the information presented, as global macroeconomics and banking aren’t really strong areas of interest for me.

If you’re interested in a broad overview of the global currency situation, I highly recommend this book. You’d have to search far and wide to get this many high-level individuals’ opinions otherwise.

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 Mar 11th, 2013

by author: jblankenship.

Posted in: Book review.
Tagged: book review

Social Security Benefits and Taxes

Mar 8th, 2013

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When you’re receiving Social Security benefits, you may be subject to income tax on those benefits. At the end of the year, you’ll receive a form SSA-1099 from the government that details the benefits that you’ve been paid, as well as the amount that has been deducted for Medicare premiums, and any federal income tax that you’ve had withheld from the benefit checks.

When you prepare your tax return for the year, if you’re using a software program (does anyone prepare them by hand any more?), the program will give you a place to enter the figures from your SSA-1099 form. Then after you’ve entered all of your other income information into the system, it will calculate how much of your Social Security benefit is subject to income tax.

But that’s no fun, is it? How do you know how much of your benefit is going to be taxable?

Here’s how it works: there is a figure known as provisional income, which is calculated using all of your other income (including tax-exempt interest) plus half of your Social Security income. Your provisional income is then compared to a base amount, depending upon your filing status.

For filing status of Single, Head of Household, Qualifying Widow(er) with a Dependent Child, or Married Filing Separately (if you did not live with your spouse at any time in the year), the base amount is $25,000
Married Filing Jointly, the base amount is $32,000
Married Filing Separately (if the spouses lived together at any time during the year), the base amount is $0

If your provisional income is above the base amount for your filing status, your Social Security benefit at least a portion of your benefit is going to be taxable. Up to 50% of your benefit may be taxable as ordinary income, until you reach the next base level. If your provisional income is greater than the first base level but less than the next base level, at most 50% of the Social Security benefit will be taxable. The next base levels are:

$34,000 (Single, Head of Household, etc.)
$44,000 (Married Filing Jointly)
$0 (Married Filing Separately)

When your provisional income is greater than the second base level, a portion of your Social Security benefit will become 85% taxable. Upon reaching the second level, a portion of the benefit is 50% taxable and the amounts above the second level are 85% taxable. As your income increases, eventually all of your Social Security benefits become 85% taxable.

If you want more detail on the calculations, you can look at this earlier article which works through the calculations for Social Security benefit taxation. It gets pretty complicated, but it’s useful to know how it all works, in case you can change your income to make a difference in how the benefits are taxed. This is also useful as you plan which types of income to recognize – if you can take Roth-type income versus regular IRA income,it can have a profound effect on the taxation of your Social Security benefits. For more on how this works, see this article on Roth Conversions and Social Security benefits.

Posted on Mar 8th, 2013

by author: jblankenship.

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Posted in: income tax, IRA, Roth Conversion, Social Security, social security benefits.
Tagged: income tax · IRA · roth conversion · Social Security

Why You Need an Emergency Fund

Mar 6th, 2013

by sraskie.

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You may or may not have heard that it’s wise to have an emergency fund. Even if you’ve heard it, you may not be aware of what it means and why you should have one – and more importantly why you need one. An emergency fund is just that. It’s money set aside for a rainy day, an unexpected bump in the road, or for a real emergency or an expense that you haven’t specifically planned for. Examples of those unexpected expenses (borderline redundant – I know) include a car accident, disability, storm damage to your home, losing a job, being a victim of theft, etc.

So what makes up an emergency fund? Generally, a good place to start is to have a goal of at least 3 to 6 months of non-discretionary living expenses put away in a relatively liquid account such as a savings, checking or money market account. Non-discretionary living expenses are those that do not go away, should you lose your job or the ability to generate income. These expenses would include your mortgage payment, rent, utilities, food, car payment and taxes.

Now comes the easy part.

Simply add up all of your non-discretionary living expenses that you have in a month and multiply by 3 and then multiply by 6. This is the amount you’d need to have set aside. For example, if I have a $1,200 mortgage, $400 in groceries per month, and utilities of $300, I would have a total of $1,900 monthly in expenses. Multiply that number by 3 ($5,700) and again by 6 ($11,400) and it looks like I’d need between $5,700 and $11,400 set aside for my emergency fund.

These amounts are not set in stone. The amount you’ll need will also depend on your job, your income, and how you’re paid. If I’m a tenured college professor making $6,000 monthly, I may only need 3 to 6 months put away. If I’m an executive or CEO of a large company and I make $20,000 monthly, or I’m a commissioned sales person making $10,000 monthly, I may consider having a fund of 9 to 12 months. This would be because there’s a good chance of me not being able to find another job at that income level if I were fired or laid off. And generally, as peoples’ incomes increase, so do their expenses.

Now comes that hard part – actually saving the money.

It’s really not that hard, it just takes a bit of planning and discipline you’ll be well on your way. You can start by putting away a small sum every week or month – depending on what works for you. This could be $50, $100, or even $500 per month until you’ve funded account. If you’re looking for places to find money consider cutting unnecessary expenses until you’ve got your emergency fund at 100%. Reduce your phone bill, cut your cable TV costs, and pack your lunch instead of dining out. Notice a pattern? These are all discretionary expenses – those that can go away if you want them to.

Your emergency fund can also be used in tandem with your insurance deductibles. Let’s say you have low deductibles on your auto insurance and want to save some money. You can simply increase your deductibles and should you need to use your deductible for a claim, you can take from your emergency fund. This is wise especially if you rarely file claims. If you have a disability policy with a 60 day elimination period (time deductible) before benefits start, you can use your emergency fund to help cover the expenses for those 60 days until your benefits begin.

Now that you know what an emergency fund is, it’s important to know what it’s not. It is not a slush fund to buy toys like a new car, boat, TV, etc. It’s not money to play with, gamble with or dip into because “It’s only a couple bucks, it can’t hurt anything.” Those couple of bucks can add up to thousands in no time. Don’t steal from yourself. Resist the temptation to spend it. If you feel you may be the type of person to be tempted, consider putting the money in an account that’s not easy to get to – such as a money market account outside of your city or state. You may also consider having check writing privileges but only on amounts above a certain amount like $250. This can help resist the urge to spend on little things help put a time buffer on when you think you want the money, and when you can actually get it.

One final note is to make sure your emergency fund is not your 401(k), 403(b), traditional or Roth IRA. These are retirement accounts and should stay as such. A properly funded emergency fund will reduce if not eliminate any reliance on premature retirement account distributions.

Now, sit back, relax, and pray you don’t need to use it!

Posted on Mar 6th, 2013

by author: sraskie.

Posted in: budgeting, credit cards, financial planning, goals, Insurance, IRA, mortgage, mortgage debt, principal residence, retirement savings, saving.

Knowing which tax form to file

Mar 4th, 2013

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When filing your own tax returns, it can be confusing to figure our which form you should use. If you are using tax preparation software, most often this choice is made for you, but if you’re doing it the old-fashioned way, you need to know which form to file.

The IRS recently issued Tax Tip 2013-04, which helps you to choose the correct form to file. The actual text of the Tip follows (I’ve cleaned up a few formatting issues):

Choosing Which Form to File

IRS e-file makes it easy for taxpayers to choose which tax form to file. Tax software automatically chooses the best form for your particular situation. Most people e-file these days, but if you prefer taking pen to paper, the IRS has some tips to help you choose the right form.

Taxpayers who choose to file a paper tax return should know that the IRS no longer mails paper tax packages. The quickest way to get forms and instructions is by visiting the IRS website at IRS.gov. You can also order forms and have them mailed to you by calling the RIS forms line at 1-800-TAX-FORM (829-3676). You may also pick up tax forms from a local IRS office, and some libraries and post offices carry tax forms.

Here are some tips that will help paper tax return filers choose the best tax form for their situation:

You can generally use the 1040EZ if:

Your taxable income is below $100,000;
Your filing status is single or married filing jointly; and
You are not claiming any dependents.

If you can’t use Form 1040EZ, you may qualify to use the 1040A if:

Your taxable income is below $100,000;
You have capital gain distributions;
You claim certain tax credits; and

You claim adjustments to income for IRA contributions and student loan interest.

If you cannot use the 1040EZ or the 1040A, you’ll probably need to file using the 1040. The reasons you must use the 1040 include:

Your taxable income is $100,000 or more;
You claim itemized deductions; and
You are reporting self-employment income.

IRS Publication 17, Your Federal Income Tax, provides helpful information about which form is best for you.

Access to IRS forms and instructions or information about e-filing, including IRS Free File, is available 24 hours a day, seven days a week on IRS.gov. Tax products often appear online well before they are available on paper. You’ll find downloadable tax products on IRS.gov by clicking on the “Forms and Pubs” link on the Home Page.

Posted on Mar 4th, 2013

by author: jblankenship.

2 comments already - add to the conversation!

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

Notify Social Security of Major Changes in Your Life

Mar 1st, 2013

1 comment

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.

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

2 comments

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.

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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.

2 comments already - add to the conversation!

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.

4 comments already - add to the conversation!

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.

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

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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.

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.