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

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 Growth and contributions are tax-free when withdrawn after age 59½.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Contributions could be withdrawn tax-free, with restrictions, prior to age 59½ – after you have left the employer.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.

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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.

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.

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.

11 comments already - add to the conversation!

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

Qualified Charitable Contributions From Your IRA in 2012 and 2013

Jan 2nd, 2013

22 comments

With the passage of the American Taxpayer Relief Act of 2012, the provision for Qualified Charitable Contributions (QCD) from an IRA has been extended to the end of calendar year 2013.

Great news, right? But what does that mean? Can you make a QCD for 2012?

As you know, the QCD provision is limited to taxpayers who are over age 70½ and thus subject to Required Minimum Distributions (RMD). In addition, the QCD must normally be sent directly from your IRA custodian to the qualified charity – it can’t be taken in cash and then sent to the charity. If you qualify and you do the distribution correctly, you will not have to include the distribution on your tax return as income. You also would not count the charitable contribution as an itemized deduction.

If you happened to send a distribution directly to a charity from your IRA during 2012, it will be treated as a QCD. This probably didn’t happen in very many circumstances since the QCD provision was not available until passage of the law on January 1, 2013.

Special Provision for 2012

For 2012 distributions there is a special provision: if you made a distribution in cash during December 2012, you have until the end of January 2013 to send a contribution in any amount up to $100,000, limited by the amount of your distribution during December 2012. You can then treat this contribution as if you had sent it directly to the charity – don’t count it as income, and don’t itemize the contribution. This distribution could have been your required distribution for the tax year 2012.

If you were waiting on the fiscal cliffhanger, you can still make a Qualified Charitable Distribution during January 2013 – directly from your IRA to the charity – and count it as if the QCD occurred in December 2012.

For 2013

For 2013, the QCD is available through the end of the year under normal rules. This means that you can, if you’re age 70½ or older, make direct distributions from your IRA to a qualified charity or charities, not counting the distribution as income and not itemizing the charitable contribution.

Posted on Jan 2nd, 2013

by author: jblankenship.

22 comments already - add to the conversation!

Posted in: #noTOP, 2012 tax year, 2013 tax year, IRA, QCD.
Tagged: IRA · QCD

2013 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)

Jan 1st, 2013

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Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately, who did not live with his or her spouse during the tax year, is considered Single and will use the information on that page to determine eligibility.

For a Traditional IRA (Filing Status Married Filing Jointly or Qualifying Widow(er)):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, and your MAGI is $95,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $95,000 but less than $115,000, you are entitled to a partial deduction, reduced by 25% for every dollar over the lower limit (or 30% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $115,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2013. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan at your job, but your spouse IS covered by a retirement plan, and your MAGI is less than $178,000, you can deduct the full amount of your IRA contributions.

If you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $178,000 but less than $188,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $188,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2013. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Jointly or Qualifying Widow(er)):

If your MAGI is less than $178,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $178,000 and $188,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $188,000 or more, you cannot contribute to a Roth IRA.

Posted on Jan 1st, 2013

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, IRA, magi.
Tagged: IRA

2013 MAGI Limits – Single or Head of Household

Jan 1st, 2013

1 comment

Note: for the purposes of IRA MAGI qualification, a person filing as Married Filing Separately who did not live with his or her spouse during the tax year, is considered Single and will use the information on this page to determine eligibility.

For a Traditional IRA (Filing Status Single or Head of Household):

If you are not covered by a retirement plan at your job, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at work, if your MAGI is $59,000 or less, there is also no limitation on your deductible contributions to a traditional IRA.

If you are covered by a retirement plan at your job and your MAGI is more than $59,000 but less than $69,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $69,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2013. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status Single or Head of Household):

If your MAGI is less than $112,000, you are eligible to contribute the entire amount to a Roth IRA.

If your MAGI is between $112,000 and $127,000, your contribution to a Roth IRA is reduced ratably by every dollar above the lower end of the range, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200. If your MAGI is $127,000 or more, you cannot contribute to a Roth IRA.

Posted on Jan 1st, 2013

by author: jblankenship.

Posted in: #noTOP, 2013 tax year.

2013 IRA MAGI Limits – Married Filing Separately

Jan 1st, 2013

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For a Traditional IRA (Filing Status Married Filing Separately):

If you are not covered by a retirement plan at your job and your spouse is not covered by a retirement plan, there is no MAGI limitation on your deductible contributions.

If you are covered by a retirement plan at your job and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If you are covered by a retirement plan at your job and your MAGI is more than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2013. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

If you are not covered by a retirement plan but your spouse is, and your MAGI is less than $10,000, you are entitled to a partial deduction, reduced by 50% for every dollar over the lower limit (or 60% if over age 50), and rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

Finally, if you are not covered by a retirement plan but your spouse is, and your MAGI is greater than $10,000, you are not entitled to deduct any of your traditional IRA contributions for tax year 2013. You are eligible to make non-deductible contributions, up the annual limit, and those contributions can benefit from the tax-free growth inherent in the IRA account.

For a Roth IRA (Filing Status of Married Filing Separately):

If your MAGI is less than $10,000, your contribution to a Roth IRA is reduced ratably by every dollar, rounded up to the nearest $10. If the amount works out to less than $200, you are allowed to contribute at least $200.

If your MAGI is $10,000 or more, you can not contribute to a Roth IRA.

Posted on Jan 1st, 2013

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, Uncategorized.

Review of 2012 Stats

Jan 1st, 2013

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Ed. Note: As in past years, I’m taking a break from my normal business of posting retirement, tax and other personal financial planning topics to report on the blog itself and the statistics we’ve seen in this, the 9th year of publication for this blog. I’ll be back to regular programming with the next entry. – jb

Over the past year, this blog has seen continued growth as in years past. This year I released An IRA Owner’s Manual, and many of you have picked up copies, thank you! In addition, this year Sterling Raskie joined the staff here at Blankenship Financial, and he’s been adding content to the blog, giving you an additional perspective on all things financial.

In November we launched the first "1% More" initiative, rallying 23 other bloggers to publish articles encouraging Americans to save at least 1% more in the coming year. This was a fulfilling project and we look forward to doing it again in the future – hopefully it will make a difference!

Through your comments and email questions I have come to meet literally hundreds and hundreds of you over the years – and we’ve learned a lot together. I’ll take this opportunity to thank you for your tremendous support by reading, asking questions, and making comments on what I have written. I hope these interactions have been as fulfilling for you as they have been for me.

Planned for 2013: more of all the wonderful income tax, IRA, Social Security and other retirement, investment and financial planning articles that you’ve come to expect; an updated edition of A Social Security Owner’s Manual; more posts from Sterling, including a series he’s been working on relating to fiscal and physical fitness; book reviews as a part of the arrangement with McGraw-Hill; and continuing the pace of approximately 150 to 200 posts throughout the year. Please pass along any suggestions for new topics that you’d like to see written up and discussed.

Listed below are the Getting Your Financial Ducks in a Row end of year statistics and Top Ten lists for 2012. A huge THANK YOU goes out to everyone that has taken part in this blog over the years!

General Statistics for 2012

151 total posts
289 comments & trackbacks
278,146 page views – averaging 760 per day (2011: 148,842 page views – averaging 408 per day)
1,018 RSS subscribers

Top 10 Referrers for 2012

Top 10 Search Engine Terms for 2012

annual gift tax exclusion
2013 social security wage base
qualified charitable distribution 2012
social security wage base
underpayment penalty
file and suspend
social security limit 2013
net unrealized appreciation
college
spousal social security options

That’s it for 2012 – Happy New Year to all, and thanks again for all your support! – jb

Posted on Jan 1st, 2013

by author: jblankenship.

Posted in: #noTOP, 2012 calendar year, blogger action, Links.
Tagged: links

Calculating the Reduced Social Security Spousal Benefit

Dec 28th, 2012

1 comment

Among the pile of very confusing calculations for various Social Security benefits is the incredibly confusing Spousal Benefit. This calculation becomes even more confusing when filed for prior to Full Retirement Age (FRA), as it is further reduced.

Briefly, the maximum amount that a Spousal Benefit can be is 50% of the other spouse’s Primary Insurance Amount (PIA). PIA, if you’ll recall, is equivalent to the amount of benefit that the other spouse would receive in benefits at his or her own Full Retirement Age. The calculation is actually a bit more complicated than that.

The Spousal Benefit for Jane (on her husband John’s record) is calculated as follows:

John’s PIA times 50% minus Jane’s PIA times the early-filing reduction factor

That amount is then added to Jane’s benefit, which could be reduced by filing early or enhanced by Delayed Retirement Credits for filing later, to come up with Jane’s total benefit.

If Jane is filing for Spousal Benefits before she reaches FRA, not only will her own benefit be reduced, but the Spousal Benefit will be reduced as well.

The calculation used to determine the reduction to the Spousal Benefit is calculated in two different ways, depending on whether Jane is filing within 3 years of FRA, or more than 3 years earlier than FRA.

If her filing is 3 years or less before her FRA, the early-filing reduction factor is as follows:

(144 minus ((Jane’s FRA – Jane’s Filing Age) times 12)) divided by 144

If Jane files more than 3 years before her FRA, the early-filing reduction factor is this equation:

(180 minus ((Jane’s FRA – Jane’s Filing Age – 3) times 12)) divided by 240

Working this out for Jane and John, where Jane’s PIA is $600 and John’s PIA is $2,000, and Jane is filing for Spousal Benefits at age 64:

(($2,000 * 50%)-$600)*((144-((66-64)*12))/144)

($1,000-$600)*((144-24)/144)

($400)*(120/144)

$400*.8333 = $333

Since Jane is 64, her own benefit is reduced to 86.66% of her PIA, or $520. Her total benefit will be the sum of the two – $520 + $333 = $853.

If Jane files for Spousal Benefits at age 62, the calculation would go like this:

(($2,000 * 50%)-$600)*((180-((66-62-3)*12))/240)

($1,000-$600)*((180-12)/240)

$400*(168/240)

$400*.7 = $280

Since Jane is 62, her own benefit is reduced to 75% of her PIA, or $450. Her total benefit is the sum of the two – $450 + $280 = $730.

In the above equations, Jane’s ages for filing and FRA have been assumed to be exactly on her date of birth, thus her age is an exact year. If she is, for example, 62 years and 3 months of age when filing, you should use the exact number of months in her age for the calculation.

Hope this helps you to better understand how this particular benefit is calculated.

Posted on Dec 28th, 2012

by author: jblankenship.

Posted in: reduction factors, Social Security, Social Security spousal benefit, Spousal Benefit.
Tagged: Social Security · spousal benefits

Getting a Transcript From the IRS

Dec 26th, 2012

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The Boston Transcript Building
Often when dealing with an issue regarding a prior year’s tax return it is necessary to get a copy of the information that the IRS has on record for your return as filed. Of course, you should always keep a copy of your original return, but in the absence of an original, the IRS’s record, known as a “transcript”, stands as the only way for you to have access to the filed information. A couple of months ago the IRS sent around their Summertime Tax Tip 2012-18 which details how you can request and receive a transcript for a prior year’s return.

The actual text of IRS Summertime Tax Tap 2012-18 follows:

How to Get a Transcript or Copy of a Prior Year’s Tax Return from the IRS

Taxpayers should keep copies of their tax returns, but if they cannot be located or have been destroyed during natural disasters or by fire, the IRS can help. Whether you need your prior year’s tax return to apply for a loan or for legal reasons, you can obtain copies or transcripts from the IRS.

Here are 10 things to know if you need federal tax return information from a previously filed tax return.

Get copies of your federal tax return via the web, phone, or by mail.
Transcripts are free and are available for the current and past three tax years.
A tax return transcript shows most line items from your tax return as it was originally filed, including any accompanying forms and schedules. It does not reflect any changes made after the return was filed.
A tax account transcript shows any later adjustments either you or the IRS made after you filed your tax return. This transcript shows basic data including marital status, type of return filed, adjusted gross income and taxable income.
To request either type of transcript online, go to IRS.gov and use the online tool called Order A Transcript. To order by phone, call 800-908-9946 and follow the prompts in the recorded message.
To request a 1040, 1040A or 1040EZ tax return transcript through the mail, complete IRS Form 4506T-EZ, Short Form Request for Individual Tax Return Transcript. Businesses, partnerships and individuals who need transcript information from other forms or need a tax account transcript must use Form 4506-T, Request for Transcript of Tax Return.
If you order online or by phone, you should receive your tax return transcript within five to 10 days from the time the IRS receives your request. Allow 30 calendar days for delivery of a tax account transcript if you order by mail.
If you need an actual copy of a previously filed and processed tax return, it will cost $57 for each tax year you order. Complete form 4506, Request for Copy of Tax Return, and mail it to the RIS address listed on the form for your area. Copies are generally available for the current year and past six years. Please allow 60 days for delivery.
The fee for copies of tax returns may be waived if you are in an area that is declared a federal disaster by the President. Visit IRS.gov, keyword “disaster”, for more guidance on disaster relief.
Forms 4506, 4506-T and 4506T-EZ are available at IRS.gov or by calling 800-TAX-FORM (800-829-3676).

Posted on Dec 26th, 2012

by author: jblankenship.