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

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

Jan 25th, 2013

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

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

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

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

Posted on Jan 25th, 2013

by author: jblankenship.

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

What is a 401(k)?

Jan 23rd, 2013

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

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

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

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

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

Restrictions

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

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

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

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

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

Contribution Limits

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

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

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

Roth 401(k)

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

Wrap up

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

Posted on Jan 23rd, 2013

by author: jblankenship.

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

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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.

Posted in: irs, tax, tax case.
Tagged: irs

Following Up on the 1% More Initiative

Dec 21st, 2012

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As a followup to the 1% More initiative that we had going on in November, I was recently interviewed by one of the participants, Steve Stewart, who blogs over at Money Plan SOS. Steve recorded the whole thing on a Money Plan SOS podcast, which you can listen to by clicking the link. He also has a written summary of our conversation for your reading pleasure.

Thanks go out to Steve, and all of the other folks who took time to write and record posts in support of the “1% More” initiative! We reached something on the order of 170,000 blog readers, over 10,000 Twitter followers, and many, many other readers. Hopefully we have made a dent in the problem!

Posted on Dec 21st, 2012

by author: jblankenship.

Posted in: blogger action, goals, guest, retirement accounts, retirement savings plans.

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

2 comments

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.