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

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Receive a Tax Credit For Saving

Dec 19th, 2012

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Starting (or staying with) a savings plan can be difficult to do. After all, it’s often difficult enough to just get by on your earnings day-to-day, week-to-week, before reducing the take-home pay that you’ve worked so hard for by putting it into a savings plan. The thing is though, once you start a savings plan, you’ll be surprised at how little it “hurts” to start putting small amounts aside. After a while, you won’t even miss it.

In addition, the IRS has a way to help you get started – it’s called the Saver’s Credit. This is a credit that you receive on your tax return, simply for putting money aside in a savings plan. Pretty sweet deal, if you asked me!

The IRS recently released their Newswire IR-2012-101, which details how the plan works and how you can take advantage of it. The full text of IR-2012-101 is below:

Plan Now to Get Full Benefit of Saver’s Credit; Tax Credit Helps Low- and Moderate-Income Workers Save for Retirement

WASHINGTON – Low- and moderate-income workers can take steps now to save for retirement and earn a special tax credit in 2012 and the years ahead, according to the Internal Revenue Service.

The saver’s credit helps offset part of the first $2,000 workers voluntarily contribute to IRAs and to 401(k) plans and similar workplace retirement programs. Also known as the retirement savings contributions credit, the saver’s credit is available in addition to any other tax savings that apply.

Eligible workers still have time to make qualifying retirement contributions and get the saver’s credit on their 2012 tax return. People have until April 15, 2013 to set up a new individual retirement arrangement or add money to an existing IRA and still get credit for 2012. However, elective deferrals (contributions) must be made by the end of the year to a 401(k) plan or similar workplace program, such as a 403(b) plan for employees of public schools and certain tax-exempt organizations, a governmental 457 plan for state or local government employees, and the Thrift Savings Plan for federal employees. Employees who are unable to set aside money for this year may want to schedule their 2013 contributions soon so their employer can begin withholding them in January.

The saver’s credit can be claimed by:

Married couples filing jointly with incomes up to $57,500 in 2012 or $59,000 in 2013;
Heads of Household with incomes up to $43,125 in 2012 or $44,250 in 2013; and
Married individuals filing separately and singles with incomes up to $28,750 in 2012 or $29,500 in 2013.

Like other tax credits, the saver’s credit can increase a taxpayer’s refund or reduce the tax owed. Though the maximum saver’s credit is $1,000, $2,000 for married couples, the IRS cautioned that it is often much less and, due in part to the impact of other deductions and credits, may, in fact, be zero for some taxpayers.

A taxpayer’s credit amount is based on his or her filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs. Form 8880 is used to claim the saver’s credit, and its instructions have details on figuring the credit correctly.

In tax-year 2010, the most recent year for which complete figures are available, saver’s credits totaling just over $1 billion were claimed on more than 6.1 million individual income tax returns. Saver’s credits claimed on these returns averaged $204 for joint filers, $165 for heads of household and $122 for single filers.

The saver’s credit supplements other tax benefits available to people who set money aside for retirement. For example, most workers may deduct their contributions to a traditional IRA. Though Roth IRA contributions are not tax deductible, qualifying withdrawals, usually after retirement, are tax-free. Normally, contributions to 401(k) and similar workplace plans are not taxed until withdrawn.

Other special rules that apply to the saver’s credit include the following:

Eligible taxpayers must be at least 18 years of age.
Anyone claimed as a dependent on someone else’s return cannot take the credit.
A student cannot take the credit. A person enrolled as a full-time student during any part of 5 calendar months during the year is considered a student.

Certain retirement plan distributions reduce the contribution amount used to figure the credit. For 2012, this rule applies to distributions received after 2009 and before the due date, including extensions, of the 2012 return. Form 8880 and its instructions have details on making this computation.

Begun in 2002 as a temporary provision, the saver’s credit was made a permanent part of the tax code in legislation enacted in 2006. To help preserve the value of the credit, income limits are now adjusted annually to keep pace with inflation. More information about the credit is on IRS.gov.

Posted on Dec 19th, 2012

by author: jblankenship.

Posted in: income tax credit, IRA, qrp, qualified retirement plan, Roth IRA, saver's credit.
Tagged: IRA · qrp · qualified retirement plan · saving

Pay Yourself First

Dec 17th, 2012

by sraskie.

1 comment

One of the first steps to saving is to get yourself on an automatic pay plan. You’re going to learn to pay yourself first. It doesn’t matter if it’s only a minimal amount. What does matter is that you are going to pay yourself first. This concept is found in the book, The Richest Man In Babylon by George S. Classon. Consider yourself the first bill you have to pay.

Here’s how you can apply this to your life:

First, one of the easiest things you can do is take a portion of your paycheck and stick it right in the bank, right away, the day you get paid. One of the best ways I know of to accomplish this is through the genius of direct deposit. If your employer allows it, have your paycheck directly deposited into your bank account each and every payday. Some employers even allow a net direct deposit and a fixed direct deposit. Net direct deposit involves the majority of your paycheck going into your checking or savings account. Fixed direct deposit entails a small portion of the same paycheck going into a different account. You can make this any amount you wish, but for now, I recommend you start small. You can always add more at another time.

The beauty of this system is that you automatically put money into a separate savings account, and you never have to worry about spending it, cashing a paycheck and physically putting the money into the account, or trying to remember to save the money in the first place. After a few months, you may even forget about it until you receive your bank statement and see a nice sum of money already growing – and you’re still living comfortably on what’s left!

Another thing you can do if you get paid by paper check is to set up a savings account with an automatic bill payment service. That way, when you cash your check and deposit it into your account, each month on a specific date a certain sum of money will be withdrawn from your checking account, into your savings account to pay the bills. This is the same as paying your bills online or having your bills automatically taken out of your account. Treat your new savings account like you would a bill. Never miss a payment.

Never.

There are two ways that you can save. The first is to participate in your employer’s 401(k), 403(b), 457, SEP, SIMPLE, or profit sharing plan. The same concept applies where you’ll dedicate a percentage or fixed amount to be saved from your paycheck every pay period. You now get the benefit of saving money, and the tax benefit of being taxed at a lower rate, since employer sponsored plans take money out on a pre-tax basis, meaning you’re taxed on the sum left over after you’ve already saved.

The second is after you get paid via direct deposit, have your bank wire the money to your IRA or transfer an amount to another savings account. That way it’s already done for you, and you needn’t write a check.

I recommend starting out by saving 10% of your income. If that’s a stretch for you, start saving 5% or even 1%. The main point is to start – now! You’ll be amazed at how quickly it grows, and how easy it becomes to save even more. A funny thing happens when your money grows: it attracts more money. You’ll become motivated to save greater and greater amounts. You’ll be excited when you look at your account and it may even put you in a good mood.

Of course money doesn’t buy happiness, but can you remember how you felt the last time you found a $5 bill or a $10 dollar bill? Heck, even a buck! Felt pretty good, didn’t it? The same will happen when you forget about what you’re saving and then suddenly you’ll open up your statement and be delighted at the tidy sum nestled away.

Posted on Dec 17th, 2012

by author: sraskie.

Posted in: 401 k 403 b, employer plan, IRA, retirement, retirement savings, saving.
Tagged: automatic savings · how to save money · IRA · pay yourself first · save from paycheck · savings

Another Good Reason to Delay Social Security Benefits

Dec 14th, 2012

1 comment

As you likely know from reading many of my articles on the subject, I have long advocated the concept of delaying your Social Security benefit as long as possible. This shouldn’t be a surprise – many financial advisors have espoused this concept for maximizing retirement income.

Lately there has been a white paper making the rounds, from a Prudential veep, Mr. James Mahaney, entitled Innovative Strategies to Help Maximize Social Security Benefits. The white paper supports the very theme that I wrote about a couple of years ago in the post Should I Use IRA Funds or Social Security at Age 62?. This paper seems to have struck a chord with a lot of folks, as I’ve received it no less than a dozen times from various folks wondering if the strategies Mr. Mahaney writes about would be useful to them.

The point is very clear: It makes a great deal of sense and saves significant tax money later in life when you can maximize the amount of Social Security income as a percentage of your overall income requirements.

I’ll run through an example to help explain how this works:

We have an individual who has a pre-tax income requirement of $75,000 per year. The individual has significant IRA assets available. If he takes Social Security at age 62, he will receive $22,500 per year. Delaying Social Security benefits to FRA would get him $30,000; waiting until age 70 would provide a benefit of $39,600 per year. In tables below we show what the tax impact would be for using Social Security at age 62, FRA, and age 70. In each case the required income is always $75,000.

Table 1 – taking Social Security benefit at age 62:

	IRA	SS	Tax
62	$ 52,500	$ 22,500	$ 9,556
63	$ 52,500	$ 22,500	$ 9,556
64	$ 52,500	$ 22,500	$ 9,556
65	$ 52,500	$ 22,500	$ 9,556
66	$ 52,500	$ 22,500	$ 9,556
…
90	$ 52,500	$ 22,500	$ 9,556
Totals	$ 1,522,500	$ 652,500	$ 277,113

Table 2 – taking Social Security benefit at age 66:

	IRA	SS	Tax
62	$ 75,000	$ 0	$ 11,113
63	$ 75,000	$ 0	$ 11,113
64	$ 75,000	$ 0	$ 11,113
65	$ 75,000	$ 0	$ 11,113
66	$ 45,000	$ 30,000	$ 7,953
…
90	$ 45,000	$ 30,000	$ 7,953
Totals	$ 1,425,000	$ 750,000	$ 243,263

Table 3 – taking Social Security benefit at age 70:

	IRA	SS	Tax
62	$ 75,000	$ 0	$ 11,113
63	$ 75,000	$ 0	$ 11,113
64	$ 75,000	$ 0	$ 11,113
65	$ 75,000	$ 0	$ 11,113
66	$ 75,000	$ 0	$ 11,113
67	$ 75,000	$ 0	$ 11,113
68	$ 75,000	$ 0	$ 11,113
69	$ 75,000	$ 0	$ 11,113
70	$ 35,400	$ 39,600	$ 5,901
…
90	$ 35,400	$ 39,600	$ 5,901
Totals	$ 1,343,400	$ 831,600	$ 212,811

The difference that you see in the tables is due to the fact that Social Security benefits are at most taxed at an 85% rate. With that in mind, the larger the portion of your required income that you can have covered by Social Security, the better. At this income level, the rate is even less, only 85% of the amount above the $44,000 base (provisional income plus half of the Social Security benefit). This results in almost $34,000 less in taxes paid over the 29-year period illustrated by delaying to age FRA, and nearly $65,000 less in taxes by delaying to age 70.

Note: at higher income levels, this differential will be less significant, but still results in a tax savings by delaying. It should also be noted that COLAs were not factored in, nor was inflation – these factors were eliminated to reduce complexity of the calculations. In addition, in calculating the tax, deductions and exemptions were not included.

Posted on Dec 14th, 2012

by author: jblankenship.

Posted in: Delayed Retirement Credit, DRC, income tax, IRA, Social Security, social security benefits, social security tax.
Tagged: delayed retirement credit · DRC · income tax · IRA · Social Security

IRA Distributions Are Not Subject to the New 3.8% Surtax

Dec 12th, 2012

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As you may be well aware, beginning in 2013 there will be a brand spanking new tax added to unearned income if your Modified Adjusted Gross Income is greater than $200,000 for Singles, and $250,000 for Married Filing Jointly. Married folks filing separately are affected above a $125,000 threshold. This surtax is to help bolster the Medicare system, and it applies specifically to unearned income.

What’s important to know is that IRA distributions (among other things) are not included as impacted by this new surtax. This means that when you make significant IRA distributions (beginning in 2013), such as to convert to a Roth IRA, this surtax will not be applied to your distribution.

Other types of unearned income that are specifically exempted from this surtax includes tax-free interest and other payouts from retirement plans such as 401(k) plans, deferred compensation plans, and pension plans.

Income that is subject to the new surtax includes interest, dividends, capital gains, annuities, royalties, and passive rental income.

None of these types of income are subject to the other brand spanking new tax – the 0.9% Medicare surtax on earned income. This one is only applicable to wage income and income from self-employment, and it applies above the same income thresholds as those listed above. Once an employee’s wages are above those levels, the additional 0.9% surtax will be withheld from the employee’s wages. The employer does not have to pay a complimentary 0.9% as with all other Medicare tax payments.

For the self-employed, the surtax will be applied when you make your quarterly estimates or when you file Schedule SE at the end of the year.

Posted on Dec 12th, 2012

by author: jblankenship.

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Posted in: #noTOP, 2013 tax year, income tax, irs, Medicare, medicare costs.
Tagged: income tax · irs · medicare

Charitable Contribution Tips

Dec 10th, 2012

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As the tax year comes to a close, many folks are looking for ways to reduce their taxes by making charitable contributions. During December’s various holidays many folks are inclined to make extra contributions as well, in the spirit of the season.

189px-YOU_ARE_ONE_-_NARA_-_516201 The IRS recently published a Special Edition Tax Tip 2012-15, which offers tips for tax benefits of gifts that you might make. The actual text of the Tip is reproduced below:

IRS Offers Tax Tips for “The Season of Giving”

December is traditionally a month for giving generously to charities, friends and family. But it’s also a time that can have a major impact on the tax return you’ll file in the New Year. Here are some “Season of Giving” tips from the IRS covering everything from charity donations to refund planning:

Contribute to Qualified Charities. If you plan to take an itemized charitable deduction on your 2012 tax return, your donation must go to a qualified charity by Dec. 31. Ask the charity about its tax-exempt status. You can also visit IRS.gov and use the Exempt Organizations Select Check tool to check if your favorite charity is a qualified charity. Donations charged to a credit card by Dec. 31 are deductible for 2012, even if you pay the bill in 2013. A gift by check also counts for 2012 as long as you mail it in December. Gifts given to individuals, whether to friends, family or strangers, are not deductible.
What You Can Deduct. You generally can deduct your cash contributions and the fair market value of most property you donate to a qualified charity. Special rules apply to several types of donated property, including clothing or household items, cars and boats.
Keep Records of All Donations. You need to keep a record of any donations you deduct, regardless of the amount. You must have a written record of all cash contributions to claim a deduction. This may include a canceled check, bank or credit card statement or payroll deduction record. You can also ask the charity for a written statement that shows the charity’s name, contribution date and amount.
Gather Records in a Safe Place. As long as you’re gathering those records for your charitable contributions, it’s a good time to start rounding up documents you will need to file your tax return in 2013. This includes receipts, canceled checks and other documents that support income or deductions you will claim on your tax return. Be sure to store them in a safe place so you can easily access them later when you file your tax return.
Plan Ahead for Major Purchases. If you are making major purchase during the holiday season, don’t base them solely on the expectation of receiving your tax refund before the bills arrive. Many factors can impact the timing of a tax refund. The IRS issues most refunds in less than 21 days after receiving a tax return. However, if your tax return requires additional review, it may take longer to receive your refund.

For more information about contributions, check out Publication 526, Charitable Contributions. The booklet is available on IRS.gov or order by mail at 800-TAX-FORM (800-829-3676).

Posted on Dec 10th, 2012

by author: jblankenship.

Posted in: charitable contribution, income tax, irs, itemized deductions.
Tagged: charitable contribution · income tax · itemized deductions

An Unexpected Result From Roth Conversion – Increased Medicare Premiums

Dec 5th, 2012

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Many folks took advantage of the one-time opportunity in 2010 to convert funds from traditional IRAs to Roth IRAs and subsequently spread the tax over the following two years, 2011 and 2012. This was a very good option for some folks who wanted to do the conversion and reduce future tax costs. However (and there’s always a however in life!), with the coming of 2013, many of these same folks are experiencing an unexpected result of the conversions: a significant increase in Medicare Part B premiums.

Beginning after 2003, Medicare Part B premiums have been partly determined by income – primarily higher income. For 2013, the increased Part B premium begins for single folks with incomes above $85,000, married couples above $170,000. The income used to calculate the Part B premium is always based on the most recent tax return, which in this case would be the 2011 tax return.

If you connect the dots, you’ll understand the reason this is now beginning to surface as an issue. 2011’s return is where the first half of those deferred Roth Conversions was reported, and so the increased income can cause a significant increase to Medicare Part B premiums. It’s important to note that this impact is not limited to the 2010 conversions – any Roth Conversion can result in an increase to your Part B premiums in the future.

For example, let’s say Joe is an average retiree, with a pension income of $35,000 in normal years. He’s 67 years old, having been on Medicare (Parts A & B) for the last two years. Joe had a traditional IRA worth $200,000 in 2010, and he decided to opt for the Roth Conversion of the total account and two-year payment of the tax. By doing this, he has to include $100,000 in his income for 2011 and 2012. As a result, his income is increased to $135,000 for those two years; those two years are then used to determine the level of premium for Medicare Part B for 2013 and 2014.

For the past couple of years, Joe’s Part B premium has been less than $100 a month – not a pittance on his income, but still manageable. Because of this increase to his income for 2011, his Part B premium will be increased to $209.80 per month in 2013 – double what it would have been, at $104.90. The same will be true for 2014, and that rate will be set sometime in November, 2013.

The good news is that the increase is temporary, in these circumstances the individual’s premium should reduce again in 2015. The bad news is that there’s nothing that can be done about it, barring a “life-changing event” that coincides with the increase in income. If your spouse died or you left employment, for example, you could contact Social Security to have your situation reviewed and the possibly premium reduced, based upon income since 2011 (possibly projected income for 2013).

Listed below are the Medicare Part B premiums for married couples at various income levels:

Married Couples
Modified AGI is:		2013 Part B Premium
More than:	But not over:	2013 Part B Premium
$170,000	$214,000	$146.90
$214,000	$320,000	$209.80
$320,000	$428,000	$272.70
$428,000	No Limit	$335.70

And this table is for single folks:

Singles
Modified AGI is:		2013 Part B Premium
More than:	But not over:	2013 Part B Premium
$85,000	$107,000	$146.90
$107,000	$160,000	$209.80
$160,000	$214,000	$272.70
$214,000	No Limit	$335.70

Posted on Dec 5th, 2012

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, Medicare, medicare part b premiums, Roth conversion, Social Security.
Tagged: medicare · roth conversion · Social Security

A friend at the IRS

Dec 3rd, 2012

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Remember that every good friend was once a stranger

Did you know that there is someone working at the IRS that you can turn to when you have problems with your federal taxes? There is. It’s called the Taxpayer Advocate Service, an independent arm of the IRS whose job is specifically to help taxpayers with their problems.

The IRS published a tax tip (back a couple of months ago) which lists ten facts that the IRS wants you to know. The actual text of Summertime Tax Tip 2012-12 is below.

Taxpayer Advocate Service: Helping You Resolve Tax Problems

The Taxpayer Advocate Service (TAS) is an independent organization within the IRS that helps taxpayers who are experiencing unresolved federal tax problems. Here are 10 things every taxpayer should know about TAS:

The Taxpayer Advocate Service is your voice at the IRS.
TAS assistance is free and tailored to meet your needs.
You may be eligible for TAS help if you’ve tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or if you are facing (or your business is facing) an immediate action from the IRS that will adversely affect you.
The worst thing you can do is nothing at all!
TAS helps individual and business taxpayers whose tax problems are causing financial difficulty, which could include the cost of hiring professional representation, such as a tax attorney.
If you qualify for TAS help, you’ll be assigned one advocate who will do everything possible to get your problem resolved.
There is ad least one local Taxpayer Advocate office in every state, the District of Columbia, and Puerto Rico. You can obtain the number of your local Taxpayer Advocate from your local phone book, in Pub. 1546, Taxpayer Advocate Service – Your Voice at the IRS and on the IRS website at IRS.gov/advocate. You can also call TAS toll-free at 1-877-777-4778.
As a taxpayer, ,you have rights that the IRS must abide by when working with you. Our tax toolkit website at www.TaxpayerAdvocate.irs.gov can help you understand these rights.
TAS also handles tax problems that may have a broad impact on more than just one taxpayer. You can report these “systemic” issues to TAS through Systemic Advocacy Management System at IRS.gov/advocate.
You can get updates on hot tax topics by visiting the TAS YouTube channel at www.youtube.com/TASNTA and the TAS Facebook page at www.facebook.com/YourVoiceAtIRS, or by following TAS tweets at www.twitter.com/YourVoiceAtIRS.

Posted on Dec 3rd, 2012

by author: jblankenship.

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

Are You Leaving Social Security Money on the Table? You Might Be, If You Don’t Understand and Use This One Rule

Nov 30th, 2012

2 comments

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

Many couples that have done some planning with regard to filing for Social Security retirement benefits have figured out how to coordinate between the higher wage earner’s benefit and the lower wage earner’s benefit. Often it makes the most sense to file for the lower wage earner’s benefit early, at or sometime near age 62, while delaying the higher wage earner’s benefit out to as late as age 70.

This method allows for a maximization of those two benefits. If you’re really astute, you probably picked up on the concept of file and suspend, as well. File and Suspend allows for the lower wage earner to increase his or her benefits by adding the Spousal Benefit, while the higher wage earner continues to delay his or her benefit, adding the delay credits.

Another little-known method that can be employed in specific circumstances is called the Restricted Application for Spousal Benefits. This method provides one spouse or the other with the option of collecting a Spousal Benefit, while at the same time delaying his or her own retirement benefit.

First Example

Let’s work through an example to help understand the concept.

Joe and Jane are both age 62, and they have expected retirement benefits at age 66 (also known as a Primary Insurance Amount, or PIA) of $2,000 and $1,000, respectively. The strategy that they intend to employ is for Jane to file now, at age 62, and then Joe will delay his benefit to age 70. By doing so, Jane’s benefit will be reduced to $750 per month; after he reaches age 70, Joe will be eligible for an increased benefit of $2,640.

The normal usage of File and Suspend won’t work in this case, since Jane’s PIA of $1,000 is equal to 50% of Joe’s PIA of $2,000. (If you need more information on File and Suspend, see this article.) This is where the Restricted Application can apply.

As we know from prior articles on the subject, the Spousal Benefit is available to one spouse when the other spouse has filed for his or her own benefit. In addition, we know that filing for a Spousal Benefit prior to Full Retirement Age (FRA) invokes deemed filing, which would require that all eligible benefits are filed for at the same time. After FRA, deemed filing does not apply.

Back to our example, when Joe reaches Full Retirement Age (FRA, age 66) he can be eligible for a Spousal Benefit based upon Jane’s record. In order to do this and still delay his benefits, he would file a Restricted Application for Spousal Benefits Only with the SSA. This type of application restricts the filing solely to Spousal Benefits. Since Joe meets the qualifications for receiving a Spousal Benefit and he’s at or older than FRA, he will be eligible to receive 50% of Jane’s PIA as a Spousal Benefit, while still delaying his own benefit. Deemed filing doesn’t apply since he’s older than FRA.

In doing this, Joe will receive $6,000 per year for four years, or $24,000 (Cost-of-Living Adjustments have been left out of our example for the sake of clarity). If Joe didn’t know about this special rule, that’s money that he would never have received at all, money left on the table.

This method will also work if the couple are farther apart in age, and if their benefits are farther apart.

Second Example

Here’s another example:

Mike is 66 and Michelle is 62. Michelle has a PIA or expected age 66 benefit of $1,800, and Mike has just filed for his own benefit in the amount of $800 per month. In order for the couple to maximize Michelle’s benefit by delaying her filing to age 70, she can file the restricted application at age 66, FRA, and receive 50% of Mike’s benefit while continuing to receive the delay credits out to age 70. When she files for her own benefit age age 70, Mike can then file for a Spousal Benefit, which would increase his own benefit by $100 for the rest of his life. This is because 50% of Michelle’s PIA of $1,800 is $900. Subtracting Mike’s PIA from that amount leaves $100 for Mike’s Spousal Benefit increase.

Third Example

Bob is 58 and his wife Roberta is 62. Roberta has a PIA of $2,000, and Bob’s projected PIA is $700. Roberta intends to delay her benefit to the maximum amount, age 70. Bob will file for his own benefit at age 62, and as such his benefit will be reduced to $525. At that time Roberta will be 66, and so she could file and suspend, which would provide Bob with an opportunity to increase his benefit by adding the Spousal Benefit. If they did that, the Spousal Benefit increase would be $210 ( after reduction since he’s under FRA), bringing his total benefit to $735. Roberta is not receiving a benefit at all at this point, she’ll receive her first benefit at age 70.

However, if at age 66 (FRA) Roberta were instead to file a restricted application for spousal benefits (instead of filing and suspending to allow Bob to file for the Spousal Benefit), the Spousal Benefit that she’d receive would be $350. She can do this since she’s at age 66 and Bob has filed for his own benefit. The Spousal Benefit of $350 is $140 more than the Spousal Benefit that Bob would receive under the File and Suspend strategy. She would receive this $350 benefit until she reaches age 70 and files for her own benefit. Then Bob could file for the Spousal Benefit at that point, increasing his overall benefit by $300, to a total benefit of $825.

If the couple didn’t use the second method, they’d be leaving $6,720 on the table, and unnecessarily leaving Bob with a lower benefit for life.

Posted on Nov 30th, 2012

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: #noTOP, Delayed Retirement Credit, restricted application, Social Security, social security benefits, Social Security spousal benefit.
Tagged: DRC · restricted application · Social Security · spousal benefit

Join in the Movement – Add 1% to Your Savings This Year!

Nov 28th, 2012

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Over the past several weeks we’ve been writing articles to encourage all Americans to add at least 1% more to savings in the coming year. More than 20 of my fellow bloggers have submitted articles, and these articles include many great ideas that you can apply in order to increase your savings rate in the coming year.

Since many employees are going through annual benefit elections right about now, it’s a very good time to increase your annual contributions to your retirement savings plans. Big changes are easiest to undertake with incremental steps – starting with adding 1% can have a great impact and get the momentum going!

Listed below are all of the articles that I’ve been notified about so far – 22 23 in all! These folks are very smart, and have shared some great ideas. You owe it to yourself to check it out, and then take action! Add that 1% to your 401(k) or IRA! If you’re a blogger, see the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far (newest are at the top):

A video tv segment from Laura Scharr: Preparing for Retirement

From Paula Hogan: 6 Ways to Add Another 1% of Income to Retirement Savings in 2013

From Kevin O’Reilly: From TwentySomething to Millionaire

From Tom Batterman: Take the 1% Challenge in 2013!!!

From Dana Anspach: Can You Spare A Penny?

From Steve Doster: The Easy Way to Become a Millionaire

From Nancy Anderson: Save 1% More for Retirement in 2013

From Kathy Stearns: Do the 1% in 2013!

From Ken Weingarten: The 1% Challenge (Should you dare to accept)

From Richard Feight: The 1% Challenge!

From John Hunter: Save What You Can, Increase Savings as You Can Do So

From Emily Guy Birken: Increase your savings rate by 1%

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From yours truly: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 28th, 2012

by author: jblankenship.

Posted in: 401k, 403 b, contribution limit, IRA, Links, qualified retirement plan.
Tagged: 401k · 403b · IRA · links · qrp

Increase Your Retirement Savings by At Least 1% in the Coming Year

Nov 26th, 2012

2 comments

Several financial bloggers (20 at last count!) have been diligently writing articles of encouragement for people to consider increasing their savings rates by at least 1% in the coming year. Since many employees are going through annual benefit elections right about now, it’s also a very good time to put in an increase to your annual contributions to your retirement savings plans. Small steps are the easiest to take, and the least painful – so why not set aside an additional 1% in your retirement plan in the coming year?

The list below includes a boatload of ideas that you can use to help you with this increase to savings. I’ve heard from several more bloggers who are going to put their posts up soon. If you’re a blogger, see the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far (newest are at the top):

From Dana Anspach: Can You Spare A Penny?

From Steve Doster: The Easy Way to Become a Millionaire

From Nancy Anderson: Save 1% More for Retirement in 2013

From Kathy Stearns: Do the 1% in 2013!

From Ken Weingarten: The 1% Challenge (Should you dare to accept)

From Richard Feight: The 1% Challenge!

From John Hunter: Save What You Can, Increase Savings as You Can Do So

From Emily Guy Birken: Increase your savings rate by 1%

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From yours truly: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 26th, 2012

by author: jblankenship.

2 comments already - add to the conversation!

Posted in: 2012 Calendar Year, 401 k, 403 b, contribution limit, employer plan, IRA, Links, qrp, qualified retirement plan.

IRS Sets 2013 Standard Mileage Rates

Nov 26th, 2012

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For several different categories of deductions, there are standard rates set by the IRS for mileage. The deductions are for business-oriented mileage, both for your own business and for miles driven on behalf of an employer (if deductible), as well as for medical purposes, deductible moving costs, and for charitable activities.

These rates are set on a “per mile” basis. The IRS calculates the applicable costs associated with driving these miles on an annual basis, which includes the cost of fuel, maintenance, insurance, taxes, and the purchase price of the vehicle (or rather, depreciation). This allows for a much more simple method of deducting these costs rather than adding up all of the costs of a vehicle and then allocating an appropriate portion to the deductible use.

You can choose between using the mileage rate or adding up all of the costs for your vehicle use, but once you’ve started using one method for a particular vehicle (especially for business use, more detail below) you should stick with that method for the life of the vehicle.

Recently the IRS published their Newswire IR-2012-95, which lists and explains the standard mileage rates for 2013. The actual text of the Newswire is below.

2013 Standard Mileage Rates Up 1 Cent per Mile for Business, Medical, and Moving

The Internal Revenue Service today issued the 2013 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2013, the standard mileage rates for the use of a car (also vans, pickups, or panel trucks) will be:

56.5 cents per mile for business smiles driven
24 cents per mile driven for medical or moving purposes
14 cents per mile driven in service of charitable organizations

The rate for business miles driven during 2013 increases 1 cent from the 2012 rate. The medical and moving rate is also up 1 cent per mile from the 2012 rate.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.

A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously.

These and other requirements for a taxpayer to use a standard mileage rate to calculate the amount of a deductible business, moving, medical, or charitable expense are in Rev. Proc. 2010-51. Notice 2012-72 contains the standard mileage rates, the amount a taxpayer must use in calculating reductions to basis for depreciation taken under the business standard mileage rate, and the maximum standard automobile cost that a taxpayer may use in computing the allowance under a fixed and variable rate plan.

Posted on Nov 26th, 2012

by author: jblankenship.

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

Holiday Spending

Nov 23rd, 2012

by sraskie.

No comments yet

Now that the Holiday season is coming into full swing, I thought I spend a little bit of time talking about keeping your budget and money in control when it comes to the giving of gifts, the getting of gifts and some ideas to make your thought count without breaking the bank (or bending your credit card).

The Holidays are a time of year where we can reflect on the people in our lives that we love, miss and want to give back to for all they have done for us throughout the years. It’s natural that we want to give as much as we can and often what we want to give may not equal what we can afford. In some cases, the number of people we want to give to exceeds our budget as well. This is where we can get into trouble. After the initial hype and high of the giving is over, the credit card bills start to come in – truly the gift that keeps on giving – or perhaps an emergency fund was spent and now needs to be rebuilt. God forbid we take out a home equity loan to fund Christmas.

Here are a few things to consider when getting ready to give gifts:

Have a budget in mind either for your total gifts or per individual, up to a total maximum amount. For example – your total gift budget may be $500. Or it could be $25 per person, up to $500. And stay within that limit.
Consider the gift you’re giving and what the person really wants. It might not be as expensive as you think, or have to be as expensive as you think. Sometimes we get caught up in what we “think” the person wants or should have. True gifts are unconditional.
A hand-written Holiday card goes a long way – all for the price of a postage stamp and your time.
Sometimes the best gift is time spent with loved ones – it’s the only thing we can’t buy more of.
Remember when you made crafts for mom and dad in school? It still works. This is also true for many people in our lives. Try making a photo collage, picture book, etc., that can be given and used and enjoyed throughout the years. Some of the gifts I’ve given my loved ones from this area are the ones they still have.
Give back. Support a local charity. Take used clothes and toys to places that give them to those less-fortunate in the community. And take your kids with you when you do it. The lesson in giving and humility is priceless.
Have a tough person to shop for? Make a donation in their name to a cause they support.

Granted, this list isn’t exhaustive – but it’s a place to start. The point is that you can still give of yourself, give the gift of love, friendship, goodwill and kindness while still giving a “material” gift – it just means you don’t have to go broke or be stressed in the New Year paying off last year’s Holiday.

Happy Holidays!

Posted on Nov 23rd, 2012

by author: sraskie.

Posted in: #noTOP, budgeting, financial planning.

C’mon America! Add 1% More to Your Retirement Savings This Year!

Nov 21st, 2012

No comments yet

My fellow financial bloggers and I have come together to encourage an increase in retirement savings this year. Since many employees are going through annual benefit elections right about now, it’s also a very good time to consider increasing your annual contributions to your retirement savings plans. Small steps are the easiest to take, and the least painful – so why not set aside an additional 1% in your retirement plan in the coming year?

Listed below are the articles in our movement so far (newest are at the top):

From Dana Anspach: Can You Spare A Penny?

From Steve Doster: The Easy Way to Become a Millionaire

From Nancy Anderson: Save 1% More for Retirement in 2013

From Kathy Stearns: Do the 1% in 2013!

From Ken Weingarten: The 1% Challenge (Should you dare to accept)

From Richard Feight: The 1% Challenge!

From John Hunter: Save What You Can, Increase Savings as You Can Do So

From Emily Guy Birken: Increase your savings rate by 1%

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From yours truly: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 21st, 2012

by author: jblankenship.

Posted in: Links, qualified retirement plan, retirement savings plans, saving.
Tagged: links · qualified retirement plan · retirement plans · saving

The “1% More” Movement’s Going Strong! Save 1% More In Your Retirement Plans This Year

Nov 19th, 2012

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United States (Photo credit: Wikipedia)

The financial blogosphere has responded with many articles recommending ways that all Americans can increase their savings rates this coming year. This has been a concerted effort by financially-oriented bloggers to help folks come up with ways to increase savings during this time of employer-benefit enrollment.

We have several more bloggers who are going to put their posts up soon. See the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far (newest are at the top):

From Ken Weingarten: The 1% Challenge (Should you dare to accept)

From Richard Feight: The 1% Challenge!

From John Hunter: Save What You Can, Increase Savings as You Can Do So

From Emily Guy Birken: Increase your savings rate by 1%

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From yours truly: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 19th, 2012

by author: jblankenship.

Posted in: Links, retirement plans, retirement savings.

Tips from the IRS to Reduce Large Refunds or Large Tax Bills

Nov 19th, 2012

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Large-billed Crow (Corvus macrorhynchos)

Quite often in my tax practice I see very large refunds being claimed every year, and sometimes (not as often) I see very large amounts of tax owed with the tax return. While a large refund isn’t necessarily a bad thing, it can be in your best interest to reduce the amount of your refund and receiving more take-home pay every month. After all, it’s your money, why should the IRS hold onto it for a year before you get it in your hands?

On the other end of the spectrum, a large tax bill when you file your tax return can cause some problems – if it’s routinely greater than $1,000, you may have additional penalties applied to the amount that you owe.

Recently the IRS issued their Summertime Tax Tip 2012-22, with tips on how you can reduce your large refund or large tax bill. The text of the Tip follows:

IRS Offers Tips to Reduce Big Refunds and Prevent Tax Bills

The Internal Revenue Service reminds taxpayers that it’s not too late to adjust their tax withholding to avoid big tax refunds or tax bills when they file their tax return next year.

Taxpayers should act soon to adjust their tax withholding to bring the taxes they must pay closer to what they actually owe and put more money in their pockets right now.

Most people have taxes withheld from each paycheck or pay taxes on a quarterly basis through estimated tax payments. Each year millions of American workers have far more taxes withheld from their pay than is required. Many people anxiously wait for their tax refunds to make major purchases or pay their financial obligations. The IRS encourages taxpayers not to tie major financial decisions to the receipt of their tax refund – especially if they need their tax refund to arrive by a certain date.

Here is some information to help bring the taxes you pay during the year closer to what you will actually owe when you file your tax return.

Employees

New Job. When you start a new job your employer will ask you to complete Form W-4, Employee’s Withholding Allowance Certificate. Your employer will use this form to figure the amount of federal income tax to withhold from your paychecks. Be sure to complete the Form W-4 accurately.
Life Event. You may want to change your Form W-4 when certain life events happen to you during the year. Examples of events in your life that can change the amount of taxes you owe inclue a change in your marital status, the birth of a child, getting or losing a job, and purchasing a home. Keep your Form W-4 up-to-date.

You typically can submit a new Form W-4 at any time you wish to change the number of your withholding allowances. However, if your life event results in the need to decrease your withholding allowances or changes your marital status from married to single, you must give your employer a new Form W-4 within 10 days of that life event. jb note: if you change your W-4 dramatically in the middle of a year, remember to re-calculate your withholding requirements at the beginning of the next year so that you are not withholding too little or too much as a result of your mid-year change.

Self-Employed

Form 1040-ES. If you are self-employed and expect to owe a thousand dollars or more in taxes for the year, then you normally must make estimated tax payments to pay your income tax, Social Security, and Medicare taxes. You can use the worksheet in Form 1040-ES, Estimated Tax for Individuals, to find out if you are required to pay estimated tax on a quarterly basis. Remember to make estimated payments to avoid owing taxes at tax time.

Publication 505, Tax Withholding and Estimated Tax, has information for employees and self-employed individuals, and also explains the rules in more detail. The forms and publication are available at IRS.gov or by calling 1-800-TAX-FORM (1-800-829-3676).

Posted on Nov 19th, 2012

by author: jblankenship.

Posted in: income tax.
Tagged: income tax

A Dozen Ways to Increase Your Savings Rate

Nov 15th, 2012

1 comment

United States (Photo credit: Wikipedia)

A baker’s dozen bloggers have now published articles encouraging all Americans to commit at least 1% more to retirement savings this year. We have several more bloggers who are going to put their posts up soon. See the original post for details on how to join the action: Calling All Bloggers!

Listed below are the articles in our movement so far (newest are at the top):

From Emily Guy Birken: Increase your savings rate by 1%

From Jonathan White: Ways to increase your retirement contributions 1% in 2013

From Alan Moore: Financial Challenge – Should You Choose To Accept It

From Ann Minnium: Gifts That Matter

From Laura Scharr: In Crisis: Personal Savings- Here Are Six Steps to Improve Your Retirement Security

From yours truly: Add Your First 1% to Your 401(k)

From Steve Stewart: Seriously. What’s 1 percent gonna do?

From Theresa Chen Wan: Saving for Retirement: The 1% Challenge for 2013

From Mike Piper: Investing Blog Roundup: Saving 1% More

From Robert Wasilewski: Increase Savings Rate By 1%

From Sterling Raskie: A Nifty Little Trick to Increase Savings

From Roger Wohlner: Need Post-Election Financial Advice? Try the 1% Solution

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

Thanks to all who have participated so far – and keep those links coming!

Posted on Nov 15th, 2012

by author: jblankenship.

Posted in: Uncategorized.

Special Treatment for an Older Spouse/Beneficiary of an IRA

Nov 14th, 2012

1 comment

Note: the situation described in this post was originally brought to my attention by Mr. Barry Picker, of Picker, Weinberg, & Auerback, CPAs, P.C. Mr. Picker is another of those “rock stars” in the world of retirement plan knowledge, up there with the best of them. Many thanks to Mr. Picker for sharing his wealth of knowledge.

There is a special set of circumstances regarding inherited IRAs that only fits a few cases – but for those cases the rules can work out favorably and it is important to understand how this operates. The circumstances are that a younger spouse has died and left an IRA to the older, surviving spouse. In this case, if the decedent-spouse had already begun receiving Required Minimum Distributions (RMDs) from the IRA, the survivor-spouse, if sole beneficiary of the IRA, can make the distribution rules work in his or her favor.

In any case, when the decedent-spouse was already receiving RMDs from the account, the survivor-spouse has two options:

continue receiving the RMDs from the account based upon the decedent’s life; or
rollover (or retitle) the IRA as his or her own IRA, and then start RMDs based upon his or her own life.

In the second option, if the surviving spouse is younger than 70½ he or she can delay the start of RMDs until he or she reaches 70½. This may be an attractive option to pursue if the surviving spouse wishes to defer the IRA distributions as long as possible.

However, in a case where the surviving spouse is older than the decedent, delay of RMDs is not an option. In addition, it should be noted that the two options listed above, while exclusive of one another (can’t both be employed at once), they could be employed one after another, only in the order of option 1 first and option 2 second.

The reason that a surviving spouse would want to do this is to stretch the IRA as long as possible. By taking Option 1, he or she can use the longer lifetime of the decedent, BUT: when calculating RMD for an inherited IRA, the divisor factor is only chosen from the IRS Table I once. Each and every subsequent year, the divisor factor is reduced by subtracting 1.

On the other hand, when using Option 2, every year the RMD divisor factor is taken from Table I, based upon the IRA owner’s attained age in that year. At some point in the future, the RMD divisor factor for Option 1 becomes less than the RMD divisor factor for Option 2 – which would mean that Option 2 (at that point) would result in a smaller RMD amount for that year and each subsequent year.

Example

Here’s an example: An IRA worth $300,000 is inherited by Jane, age 77, from John, who was 74 at the time of his death. Jane has the options listed above – leave the IRA in John’s name and continue receiving RMDs based upon his life, or retitle (or rollover) the IRA to her own name and start RMDs based upon her life.

The divisor factor for RMDs for the first year after John’s death, based on John’s life (from Table I) is 13.4. At the same time, the divisor factor based on Jane’s life for that year is 11.4. So for the first year after John’s death, the smallest RMD is calculated by using John’s life. Below are the factors for each year thereafter:

Year	Decedent Divisor	Survivor Divisor
1	13.4	11.4
2	12.4	10.8
3	11.4	10.2
4	10.4	9.7
5	9.4	9.1
6	8.4	8.6
7	7.4	8.1

As you can see, in Year 6 after John’s death, the divisor based on Jane’s life becomes larger than the divisor based on John’s life, due to the way the year-over-year calculations are done. At this point, it will become advantageous for Jane to rollover the IRA (or retitle it) to an IRA in her own name, and then continue the RMDs based upon her own life. This will stretch the IRA distributions out for a longer period of time.

So by taking Option 1 first and then taking Option 2 later, Jane can stretch out the IRA distributions as far as possible. If she stays on John’s schedule, the entire IRA would have to be distributed by the end of the 14th year after his death. Switching over to her own distribution schedule after the 6th year (when it becomes advantageous to do so), the IRA distribution can be stretched out over her entire lifetime, potentially as much as 23 years after John’s death.

As I mentioned at the outset, this situation won’t fit too many folks, or benefit very many, but it could be useful for specific situations.

Posted on Nov 14th, 2012

by author: jblankenship.

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

Add Your First 1% to Your 401(k)

Nov 12th, 2012