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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

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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

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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

9 comments

Many of my fellow bloggers and I have become concerned about how low the rate of savings has been for Americans in general. To see a list of all of the articles in the 1% More Movement, check out the article at this link.

Since November is traditionally the time when corporate employees make elections for all other benefits, including health insurance, life insurance, and other employee benefits, now is a good time to also consider increasing your 401(k) contributions.

For my article, I’m focusing on the employee who hasn’t been participating in a 401(k) plan at all.

Your First 1% in Your 401(k)

If you haven’t been putting anything at all into your 401(k) plan at all, putting that first 1% into the 401(k) plan can be a little scary. But you need to know that this is a monumental action. Getting started with savings is the most important step you can take – and it’s only scary for a little while. Keep reading, you’ll see how putting aside that first 1% can be relatively painless, and after a while, it gets to be fun watching your account increase in value.

For our example, let’s say you make $30,000 annually and your employer matches 401(k) contributions as follows:

100% of the first 2% of contributions

50% of the next 2% of contributions

25% of the next 2% of contributions

Your net paycheck today, when you’re not making any 401(k) contributions, is $884.82 – this is after taxes and insurance premiums have been deducted. When you make the decision to contribute 1% of your income to your 401(k), you will be putting aside $11.54 every paycheck (assuming you’re paid 26 times a year). The end result is that your paycheck will only go down by $5.91, to approximately $878.91 – the total amount you’ll “lose” from your take-home pay over the course of the year is $153.66.

Since your employer matches 100% of your first 2% in contributions, for this first 1% contribution you’re making, you’ll actually have a total of $23.08 in your account every two weeks when you get paid. At the end of the year, a total of $600.08 will be set aside for you, and all you had to do was learn how to get by on $12.80 less per month! I think you’ll agree that this is doable, right?

Now get out there and do it! Add 1% to your 401(k) plan right away, it will definitely pay off in the long run, and you’ll never miss it.

Posted on Nov 12th, 2012

by author: jblankenship.

9 comments already - add to the conversation!

Posted in: 401 k, Links, retirement savings.
Tagged: 401 k · links · retirement savings

Save 1% More! Here are 7 ways to do it

Nov 10th, 2012

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United States (Photo credit: Wikipedia)

Seven bloggers have now published articles encouraging all Americans to commit at least 1% more to retirement savings this year as they make their benefit elections. 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:

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

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

From Sterling Raskie: A Nifty Little Trick to Increase Savings

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

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

Posted on Nov 10th, 2012

by author: jblankenship.

Posted in: investing, IRA, Links, retirement plan.

Social Security Bend Points in 2013

Nov 9th, 2012

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When the Social Security Administration announced the Cost of Living Adjustment (COLA) for 2013, this also allowed for calculation of the bend points for 2013.

Bend points are the portions of your average income (Average Indexed Monthly Earnings – AIME) in specific dollar amounts that are indexed each year, based upon an obscure table called the Average Wage Index (AWI) Series. They’re called bend points because they represent points on a graph of your AIME graphed by inclusion in calculating the PIA.

If you’re interested in how Bend Points are used, you can see the article on Primary Insurance Amount, or PIA. Here, however, we’ll go over how Bend Points are calculated each year. To understand this calculation, you need to go back to 1979, the year of the Three Mile Island disaster, the introduction of the compact disc and the Iranian hostage crisis. According to the AWI Series, in 1979 the Social Security Administration placed the AWI figure for 1977 at $9,779.44 – AWI figures are always two years in arrears, so for example, the AWI figure used to determine the 2013 bend points is from 2011.

With the AWI figure for 1977, it was determined that the first bend point for 1979 would be set at $180, and the second bend point at $1,085. I’m not sure how these first figures were calculated – it’s safe to assume that they are part of an indexing formula set forth quite a while ago. At any rate, now that we know these two numbers, we can jump back to 2011’s AWI Series figure, which is $42,979.61. It all becomes a matter of a formula now:

Current year’s AWI Series divided by 1977’s AWI figure, times the bend points for 1979 equals your current year bend points

So here is the math for 2013’s bend points:

$42,979.61 / $9779.44 = 4.3949

4.3949 * $180 = $791.08, which is rounded down to $791 – the first bend point

4.3949 * $1,085 = $4,768.47, rounded down to $4,768 – the second bend point

And that’s our bend points for 2013. Enjoy!

Posted on Nov 9th, 2012

by author: jblankenship.

Posted in: #noTOP, cost of living adjustment, Social Security, social security administration, social security benefits.
Tagged: cost of living adjustment · Social Security

Financial Bloggers Encourage Americans to Save 1% More

Nov 8th, 2012

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United States (Photo credit: Wikipedia)

We’re now up to ~~five~~ six posts published in support of the movement to encourage all Americans to commit at least 1% more to retirement savings this year as they make their benefit elections. 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:

From Michele Clark: Employer Retirement Accounts: 2013 Contribution Limits

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

From Sterling Raskie: A Nifty Little Trick to Increase Savings

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%

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

Posted on Nov 8th, 2012

by author: jblankenship.

Posted in: Links, retirement savings.

A Nifty Little Trick to Increase Savings

Nov 7th, 2012

by sraskie.

8 comments

A nifty little trick that can be part of your savings plan is simply this: once a debt is paid off, still treat that payment as a bill – but now direct that bill payment to your bank account, IRA, or employer sponsored plan.

Here’s how it works: Let’s say you have a car payment of $250 per month. You’ve worked hard to get the debt reduced and eventually (maybe even early) you pay off your loan on the car. What a feeling! Instead of allocating the money to be spent elsewhere, such as buying another car or spending it on other items you probably don’t need, consider taking that $250 per month and reallocating it to yourself. The easy thing about this is that you’re already used to paying it, you’ve already budgeted for it, why not pay yourself? Also, you can consider putting the payment to yourself on auto-pilot, meaning that the money goes directly from your paycheck or bank account to your IRA, 401(k), etc.. Psychologically, it’s a lot less painful (and physically easier) to have money sent automatically from an account than to physically have to write a check.

Another idea to consider is that, should you have additional debt after you’ve paid off your car, consider taking that “former” car payment and paying down the other debt that you have. There are few guarantees in life – one of them can be guaranteeing yourself a rate of return. How? The faster you pay down a debt, the less interest you’re paying. Take for example a car loan of 5%. If you want to guarantee yourself a 5% return on your money, pay that loan off as early as possible. Although you won’t see a 5% credit to your bank account like you would on a 5% savings account, you will feel the benefits of doing this when you’re done paying off a loan 2 or 3 or even 5 years early, and can redirect what would have been “interest” money to your lender, back into your pocket.

Posted on Nov 7th, 2012

by author: sraskie.

8 comments already - add to the conversation!

Posted in: financial planning, interest rate, IRA, retirement savings.
Tagged: financial planning · IRA · retirement savings

Calling All Bloggers – Let’s Increase America’s Savings Rate in November!

Nov 5th, 2012

19 comments

I’m sure that I’m not alone in the financial planning world with my concern about the rate of saving toward retirement across this great land. Recent figures have shown that we Americans are doing a little bit better of late, at a 5% savings rate versus around 1% back in 2005 – but this is a dismal figure when you consider how most folks are coming up short when they want to retire. Rather than sitting by idly and wringing my hands, I thought maybe something could be done to encourage an increase in savings – if only by 1%, this can be a significant step for lots of folks. And now, in November, is the perfect time to do this, as most corporations are going through the annual benefit election cycle, so the 401(k) (or 403(b), 457, or other savings plan) is right at the forefront for many folks.

I’m proposing that all financially-oriented bloggers sharpen up their electronic pencils and write a column to encourage folks to increase their 401(k) savings by at least 1% more than last year. I’d suggest taking a new look at this situation, perhaps suggesting ways that people can free up money to devote toward savings, for example. I know you folks have a lot of great ideas, so don’t let my lame suggestions limit you!

In order to keep it oriented toward the benefits enrollment period for many companies, we should probably produce these articles between now and Thanksgiving. Of course, most folks can make an increase to savings at any time, but while employees are looking at benefit options is a good time to strike while the iron’s hot. If you’re interested in joining this action, send me a note at jim@blankenshipfinancial.com and let me know when you’ve posted your article. I’ll keep a list of all of the articles with links on a blog post at my blog – this way anyone who’s looking for ideas on how to increase savings can find a multitude of ways to do so.

Thanks in advance for your help!

Posted on Nov 5th, 2012

by author: jblankenship.

19 comments already - add to the conversation!

Posted in: 401 k, 403 b, blogger action, budgeting, Links, retirement savings.
Tagged: 401 k · 403 b · links · retirement savings

IRS Warns of Phony Websites

Nov 5th, 2012

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It pays to be careful out there on the interwebs. You never know what you might be getting into if you don’t pay close attention to the addresses that you click on. Recently the IRS issued a warning about certain scams that have been making the rounds recently. The funny thing is, they had to issue their warning a second time because they initially posted an incorrect address.

At any rate, the text of the IRS’ Corrected Special Edition Tax Tip 2012-13 is listed below:

Don’t Fall for Phony IRS Websites

The Internal Revenue Service is issuing a warning about a new tax scam that uses a website that mimics the IRS e-Services online registration page.

The actual IRS e-Services page offers web-based products for tax preparers, not the general public. The phony web page looks almost identical to the real one.

The IRS gets many reports of fake websites like this. Criminals use these sites to lure people into providing personal and financial information that may be used to steal the victim’s money or identity.

The address of the official IRS website is www.irs.gov. Don’t be misled by sites claiming to be the IRS but ending in .com, .net, .org, or other designations instead of .gov.

If you find a suspicious website that claims to be the IRS, send the site’s URL by email to phishing@irs.gov. Use the subject line, “Suspicious website”.

Be aware that the IRS does not initiate contact with taxpayers by email to request personal or financial information. This includes any type of electronic communication, such as text messages and social media channels.

If you get an unsolicited email that appears to be from the IRS, report it by sending it to phishing@irs.gov.

The IRS has information at www.irs.gov that can help you protect yourself from tax scams of all kinds. Search the site using the term “phishing”.

Posted on Nov 5th, 2012

by author: jblankenship.

Posted in: financial planning, income tax, irs, Links.
Tagged: income tax · irs · links

How is the Maximum Social Security Benefit Calculated?

Nov 2nd, 2012

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Each year when the Social Security Administration announces the Cost Of Living Adjustment to benefits for the coming year, with similar ballyhoo they announce the maximum benefit amount available for the coming year. For 2013, the maximum Social Security benefit for someone reaching Full Retirement Age (FRA) in that year will be $2,533, an increase of $20 over 2012.

In the wake of these announcements a couple of weeks ago, a reader (thanks, DS!) sent me a question:

Why is it that the maximum Social Security benefit only increased from $2,513 to $2,533? This is only an increase of 0.8%, while the COLA increase indicated that benefits would climb by 1.7%?

This is a drawn out and complicated situation to explain, but I think it’s important to fully understand. First, you have to realize that when the Social Security folks publish this maximum amount, they are talking specifically about someone who reaches Full Retirement Age in the year being reviewed. For 2012, that would be someone born in 1946; for 2013, the person was born in 1947. As such, the calculations are based on different maximum wage bases.

The way that the maximum benefit for a particular year is calculated is based upon the maximum wage base for the year, as well as the applicable COLAs that would apply after the PIA (Primary Insurance Amount) has been calculated for that individual.

Maximum Benefit Calculation for 2012

For calculating the maximum benefit amount for 2012, we’re looking at an individual who was born in 1946, turning age 66 in the year 2012. The table below indicates the maximum wage bases for each year from his age 22 in 1968, through 2011, because his maximum benefit was determined last year. The third column indicates what the wage base equates to in terms of indexed income – this is based on the Average Wage Index (AWI) Series.

Year	Max Wage Base	Indexed Wage Base
1968	$ 7,800	$ 54,109
1969	$ 7,800	$ 51,152
1970	$ 7,800	$ 48,734
1971	$ 7,800	$ 46,402
1972	$ 9,000	$ 48,763
1973	$ 10,800	$ 55,069
1974	$ 13,200	$ 63,530
1975	$ 14,100	$ 63,143
1976	$ 15,300	$ 64,095
1977	$ 16,500	$ 65,213
1978	$ 17,700	$ 64,809
1979	$ 22,900	$ 77,104
1980	$ 25,900	$ 80,000
1981	$ 29,700	$ 83,347
1982	$ 32,400	$ 86,181
1983	$ 35,700	$ 90,546
1984	$ 37,800	$ 90,550
1985	$ 39,600	$ 90,985
1986	$ 42,000	$ 93,719
1987	$ 43,800	$ 91,875
1988	$ 45,000	$ 89,960
1989	$ 48,000	$ 92,304
1990	$ 51,300	$ 94,295
1991	$ 53,400	$ 94,630
1992	$ 55,500	$ 93,529
1993	$ 57,600	$ 96,244
1994	$ 60,600	$ 98,608
1995	$ 61,200	$ 95,747
1996	$ 62,700	$ 93,517
1997	$ 65,400	$ 92,168
1998	$ 68,400	$ 91,601
1999	$ 72,600	$ 92,093
2000	$ 76,200	$ 91,592
2001	$ 80,400	$ 94,390
2002	$ 84,900	$ 98,688
2003	$ 87,000	$ 98,710
2004	$ 87,900	$ 95,301
2005	$ 90,000	$ 94,140
2006	$ 94,200	$ 94,200
2007	$ 97,500	$ 97,500
2008	$ 102,000	$ 102,000
2009	$ 106,800	$ 106,800
2010	$ 106,800	$ 106,800
2011	$ 106,800	$ 106,800

When the top 35 years of wage base are averaged, we come up with an annual average wage base of $92,172, or a monthly average wage base (also known as the Average Indexed Monthly Earnings or AIME) of $7,681. Applying the bend points to this (see the Bend Point article for details) we come up with a tentative PIA of $2,293. To this we apply the COLAs from the point when the individual reached age 62 (in 2008): 5.8%, 0.0%, 0.0%, and 3.6%. These are compounded, so the increase by COLAs is 9.61% (1.058 * 1 * 1 * 1.036 = 1.0961). Multiplying the tentative PIA (Primary Insurance Amount) by these COLAs brings us to the maximum benefit amount of $2,513 for 2012.

Maximum Benefit for 2013

To calculate the maximum benefit for 2013, we are now working with an individual who will reach age 66 in that year, born in 1947. Below is the table for this individual’s maximum benefit:

Year	Max Wage Base	Indexed Wage Base
1969	$ 7,800	$ 53,474
1970	$ 7,800	$ 50,946
1971	$ 7,800	$ 48,508
1972	$ 9,000	$ 50,975
1973	$ 10,800	$ 57,568
1974	$ 13,200	$ 66,413
1975	$ 14,100	$ 66,009
1976	$ 15,300	$ 67,003
1977	$ 16,500	$ 68,173
1978	$ 17,700	$ 67,750
1979	$ 22,900	$ 80,603
1980	$ 25,900	$ 83,631
1981	$ 29,700	$ 87,131
1982	$ 32,400	$ 90,091
1983	$ 35,700	$ 94,655
1984	$ 37,800	$ 94,659
1985	$ 39,600	$ 95,115
1986	$ 42,000	$ 97,969
1987	$ 43,800	$ 96,045
1988	$ 45,000	$ 94,046
1989	$ 48,000	$ 96,494
1990	$ 51,300	$ 98,573
1991	$ 53,400	$ 98,924
1992	$ 55,500	$ 97,774
1993	$ 57,600	$ 100,610
1994	$ 60,600	$ 103,081
1995	$ 61,200	$ 100,093
1996	$ 62,700	$ 97,762
1997	$ 65,400	$ 96,354
1998	$ 68,400	$ 95,760
1999	$ 72,600	$ 96,275
2000	$ 76,200	$ 95,753
2001	$ 80,400	$ 98,675
2002	$ 84,900	$ 103,162
2003	$ 87,000	$ 103,191
2004	$ 87,900	$ 99,626
2005	$ 90,000	$ 98,406
2006	$ 94,200	$ 98,477
2007	$ 97,500	$ 97,500
2008	$ 102,000	$ 102,000
2009	$ 106,800	$ 106,800
2010	$ 106,800	$ 106,800
2011	$ 106,800	$ 106,800
2012	$ 110,100	$ 110,100

The reason that this table is different from the one above (look at the indexed wage base for each year) is because the index is always normalized to the year when the individual reaches age 60 – when the PIA is originally calculated. When we average the top 35 indexed wages for this series, we come up with an average of $96,888, or an AIME of $8,074. Applying the 2012 bend points to this AIME, we come up with a tentative PIA of $2,404. To this we add the COLAs for the years from 2009 to 2012: 0%, 0%, 3.6% and 1.7%. This aggregates to 5.36% increase, up to $2,533.

What does this mean?

Because of the way these calculations are done, and what the Social Security folks mean by them, it’s not really important to compare these two numbers to one another – it’s not even the same person that we’re looking at. In actuality, a PIA for someone who earned the maximum salary over her entire working life and who reached age 66 in 2012 would be increased to $2,556, exactly 1.7%.

So – when calculating the maximum amount that you will have available to you, keep in mind all of the nuances in the calculation process, and make sure that you are working on your own circumstances, not the sample that SSA is putting forth as the “maximum”.

Posted on Nov 2nd, 2012

by author: jblankenship.

Posted in: cola increase, cost of living adjustment, Social Security, social security benefits.
Tagged: cola increase · cost of living adjustment · Social Security

Retirement Plan Contribution Limits for 2013

Oct 31st, 2012

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The IRS recently published the new contribution limits for various retirement plans for 2013. These limits are indexed to inflation, and as such sometimes they do not increase much year over year, and sometimes they don’t increase at all.

This year we saw across-the-board increases for most all contribution amounts, and as usual the income limits increased as well. This provides increased opportunity for savings via these tax-preferred vehicles.

IRAs

The annual contribution limit for IRAs (both traditional and Roth) increased from $5,000 in 2012 to $5,500 in 2013. The “catch up” amount, for folks age 50 or over, remains at $1,000.

The income limits for traditional (deductible) IRAs increased slightly from last year: for singles covered by a retirement plan, your Adjusted Gross Income (AGI) must be less than $59,000 for a full deduction; phased deduction is allowed up to an AGI of $69,000. This is an increase of $1,000 over the limits for last year. For married folks filing jointly who are covered by a retirement plan by his or her employer, the AGI limit is increased to $95,000, phased out at $115,000, which is a $3,000 increase over last year’s limits. For married folks filing jointly who are not covered by a workplace retirement plan but are married to someone who is covered, the AGI limit for deduction is $178,000, phased out at $188,000; this is an increase of $5,000 over 2012’s limits.

The income limits for Roth IRA contributions also increased: single folks with an AGI less than $112,000 can make a full contribution, and this is phased out up to an AGI of $127,000. For married folks filing jointly, the AGI limits are $178,000 to $188,000 for Roth contributions, up by $5,000 over 2012.

401(k), 403(b), 457 and SARSEP plans

For the traditional employer-based retirement plans, the amount of deferred income allowed has increased as well. For 2013, employees are allowed to defer up to $17,500 (up from $17,000) with a catch up amount of $5,500 for those over age 50 (unchanged from 2012). If you happen to work for a governmental agency that offers a 457 plan in addition to a 401(k) or 403(b) plan, you can double up and defer as much as $35,000 plus catch-ups.

The limits for contributions to Roth 401(k) and Roth 403(b) are the same as traditional plans – the limit is for all plans of that type in total. You are allowed to contribute up to the limit for either a Roth plan or a traditional plan, or a combination of the two.

SIMPLE

Savings Incentive Match Plans for Employees (SIMPLE) deferral limits also increased, from $11,500 to $12,000 for 2013. The catch up amount remains the same as 2012 at $2,500, for folks at or older than age 50.

Saver’s Credit

The income limits for receiving the Saver’s Credit for contributing to a retirement plan increased for 2013. The AGI limit for married filing jointly increased from $57,500 to $59,000; for singles the new limit is $29,500 (up from $28,750); and for heads of household, the AGI limit is $44,250, an increase from $43,125. The saver’s credit rewards low and moderate income taxpayers who are working hard and need more help saving for retirement. The table below provides more details on how the saver’s credit works:

**Filing Status/Adjusted Gross Income for 2013**
Amount of Credit	Married Filing Jointly	Head of Household	Single/Others
50% of first $2,000 deferred	$0 to $35,500	$0 to $26,625	$0 to $17,750
20% of first $2,000 deferred	$35,501 to $38,500	$26,626 to $28,875	$17,751 to $19,250
10% of first $2,000 deferred	$38,501 to $55,500	$28,876 to $44,250	$19,251 to $29,500

Posted on Oct 31st, 2012

by author: jblankenship.

Posted in: #noTOP, 2013 tax year, Annual limits, contribution limit, IRA, Roth IRA.
Tagged: 401 k · annual limits · contribution limit · IRA

Book Review: The Chinese Way to Wealth and Prosperity

Oct 29th, 2012

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The Chinese Way to Wealth and Prosperity

You’d have to be living under a rock to have not noticed how the Chinese people have pretty much taken over all the top spots in most all pursuits – athletic, artistic, educational, financial, and most other areas of life.

This book, by Michael Justin Lee, a Chartered Financial Analyst and formerly the nation’s first Financial Markets Expert-in-Residence in the US Department of Labor, seeks to explain the reasons behind the success of the Chinese in so many areas of life. Mr. Lee delivers concrete examples of how this likely has come to be.

Admittedly, the success that the Chinese people are experiencing is not limited solely to the Chinese, and the author points this out – it appears that much of the basis behind this success comes from Confucian teaching, which influences many other Asian countries. It’s not surprising that Japan, Taiwan, Hong Kong, and other Eastern countries are experiencing similar success, and all are strongly influenced by Confucian teachings, as well as Buddhist philosophies.

Many of these teachings, ingrained in the family, are similar to notions that you might feel are common knowledge in the categories of “doing what’s right” that you’ve heard your entire life. For example: getting an education, thinking beyond your own generation, keep your debt to a minimum, and deferring gratification. Confucian principles take these ideas to another level altogether, and this is among the reasons that Asians have had such success in so many areas, according to Lee.

Mr. Lee does an excellent job of explaining these ideas, giving examples of how the various facets of life for the Chinese have prepared them to become as dominant as they have. I quite enjoyed the way he presents his information – and I believe there are lessons to be learned from this book for everyone.

History has shown that this sort of superiority changes in cycles. Not that long ago, China was among the lower classes in terms of many of these categories, and countries such as the US, Germany, and Great Britain claimed top spots. I suspect that such cycles may continue to occur, as success often leads to excesses, which often leads to downfall. I guess we’ll see what happens!

The above book review is part of a series of reviews that I am doing in an arrangement with McGraw-Hill Professional Publishing, where MH sends me books with the only requirement being that I read the book and write a review – like it or not. If you find the information in this review useful, let me (and McGraw-Hill) know!

Posted on Oct 29th, 2012

by author: jblankenship.

Posted in: Book review.
Tagged: book review

Long Term Care Insurance – Protecting Your Nest Egg

Oct 24th, 2012

by sraskie.

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Long term care is a topic few people know about and a topic even fewer people are prepared to deal with in the future. As the average life expectancy increases in the US, more and more people – from Baby Boomers to X and Y geners – are going to be confronted with the need for and planning for long term care.

According to the Medicare website, about 9 million men and women over age 65 will need LTC this year – that number expanding to 12 million by 2020. According to the Department of Health and Human Services, people who reach age 65 will have a 40% chance of entering a nursing home and 10% of those will stay there for more than 5 years. This, of course, can get expensive. This is where an LTC policy can make sense.

There are two types of LTC policies that a person may obtain: Tax Qualified and Non-Tax Qualified. Non-Tax Qualified policy coverage starts when a person is stated have a medical necessity by a doctor and corresponding insurance company representative. These “triggers” start the claim period and benefits.

Most individuals will purchase Tax Qualified policies. The premiums for these are deductible for income tax purposes (subject to the 7.5% floor) and the coverage goes into effect when a person is incapable of performing at least two out of six activities of daily living – or ADL’s. These ADL’s or policy “triggers” are bathing, eating, dressing, toileting, transferring from bed to chair and continence. Also, substantial cognitive impairment will also trigger a claim.

Although walking is considered an ADL for non-tax qualified policies, it IS NOT an ADL for a tax-qualified policy.

Benefits can range from custodial care, skilled nursing care, home care, hospice care and comprehensive care depending on the type of policy purchased. Premiums will be adjusted accordingly depending on the type, nature and scope of the coverage. Policies will also have different elimination periods (time deductibles) of 30, 60, 90 and 180 days. A longer elimination period will mean lower premiums, but will also mean more time to wait until benefits begin. Here is where an emergency fund can be very useful. 3-6 months of living expenses can help offset a long elimination period.

It should also be noted that Medicare DOES NOT cover custodial care – it is specifically excluded.

From a planning standpoint, not having LTC can quickly erode a lifetime of savings, investing and legacy planning. It can be a useful hedge to help keep a retirement portfolio in place, but can also (if not most importantly) keep undue stress off of a family that may feel obligated to care for a loved-one, if a LTC plan is not in place. It also goes without saying that it is impossible to get an LTC policy once cognitive impairment or an ADL has appeared.

Generally, the optimal time to consider LTC is after the age of 50. However, people may want to consider it earlier if they have a family history of mental illnesses (Alzheimer’s and or dementia) or if family members want to get together and “pool” the premium payments among siblings for their parents. This can assure less stress in the future by not having to feel obligated to take care of a loved one, and can also purchase the best care you’d like to see a loved-one have. It can also mitigate responsibilities of family members who live closer to aging relatives, while others live further away.

If you’re considering LTC, it’s important to ask your questions and do your due diligence. How much does the policy cost, what does it cover, what is the daily benefit, etc., are all excellent questions. You may also consider the financial stability of the company offering the policy and length of coverage as well. Don’t be afraid to ask questions. A competent LTC advisor will be happy to help answer your questions and do the best for your needs.

In the end, you can sleep a little better knowing that you’ve just hedged and protected your future, your legacy and your retirement, while lowering your stress.

Posted on Oct 24th, 2012

by author: sraskie.

Posted in: health insurance, Insurance.

Factors to take into account when planning Social Security filing

Oct 19th, 2012

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As with the overall process of planning for retirement income, there are certain important factors external to Social Security benefits that you need to take into account while planning when to file for benefits. In the list below I will detail some of these factors and why they are important to the process.

Important Factors When Planning Social Security Filing

Pension income. Pension income must be considered with special care when planning your Social Security filing strategy. Often, pensions will increase in value up to a certain age of commencement and then there are no increases after that age. Coordinating your pension with your Social Security benefits can enhance your overall income stream – since a pension is generally a guaranteed source of income for yourself and possibly your spouse.

In addition, since many pensions are not indexed for inflation, meaning that there are no Cost-of-Living-Adjustments (COLAs), it probably makes a great deal of sense to maximize the amount that you can receive from this source. Depending upon your needs, starting Social Security benefits earlier could provide you with the income you need in order to maximize your pension.

Personal Assets. Funds that you have saved over the years can help you to bridge the gap between your current age (if you’re stopping work) and the age that maximizes your Social Security benefits (and pension benefits, as noted above). While it may be difficult to stomach, it may work in your favor to start taking some funds from your retirement plans (IRAs, 401(k)s, and the like) or taxable investment or savings accounts.

This is the reason that you’ve set aside this money over the years – taking distributions from these accounts so that you can delay other benefits may make all the difference. The point is that delaying to increase the amount(s) of your guaranteed income streams is likely very much worth the amount you are taking from the accounts in the long run.

Earnings from working. As you likely have realized, working part time in your retirement could be a good way to maximize your income. As with all income-producing efforts, work, even part-time, can be a very valuable asset. For other types of assets to produce income, there must be a store of value existing in order for the income to flow. In Social Security benefits the store of value is your earnings history; the same goes for pension benefits. With retirement accounts, the amount of savings you’ve built up is the store of value.

Working, at any age, utilizes the store of value of your own experience, skills, and knowledge. Continuing to work produces income from that store of value, income that otherwise would go unrealized.

General health. If your health is declining and the expectation is that your life-span will be somewhat less than the average, this can influence your need to start Social Security benefits earlier rather than later. However, as we’ve discussed in the past, it is not only your own health (e.g., longevity) that is important to consider. The health of your dependent beneficiaries is just as important, if not more so, especially if your Social Security benefit is large enough for others to depend upon it after you’ve passed.

Income requirements. The amount of income that you need to get by and pay your ordinary expenses can also influence your time to file for Social Security benefits. If you just can’t make ends meet using all of your other sources of income, it might be necessary to file for your Social Security benefit before it is maximized.

Posted on Oct 19th, 2012

by author: jblankenship.

Posted in: baby boomers, IRA, Social Security, social security retirement.
Tagged: baby boomers · IRA · Social Security

Investing in Taxable Accounts vs. IRAs

Oct 17th, 2012

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When investing beyond an employer-sponsored retirement plan, you have a choice to make, between using an IRA, a Roth IRA, or a taxable, non-deferred investment account. In making this choice your primary consideration should be the tax implications.

It’s easy to understand the current tax implications: if you invest in a traditional IRA and your contributions are deductible, you are saving the income tax of the deductible contribution. In all other choices, there is no current tax impact. For non-deductible contributions to a traditional IRA, or regular contributions to a Roth IRA, or saving in a taxable account, you are paying income tax as you’ve earned the money, regardless of what you do with it.

The second area to consider tax implications on all of these types of accounts is when there is income produced from the investments within each type of account. Income produced includes capital gains from sales as well as dividends and interest. In an IRA or Roth IRA, when income is produced there is no tax impact, as all tax is deferred. In the case of the taxable investment account there is current impact in terms of dividend taxation or capital gains tax. Presently capital gains are taxed at a maximum rate of 15% – but this could change, depending upon what Congress decides to do.

Many investments in taxable accounts can maintain tax deferral until you sell the security. Mutual funds often distribute capital gains annually, but stocks and ETFs often don’t produce capital gains until you sell the security – so you don’t have to recognize the income until you’re ready to sell.

The other, most important, impact is the rate of tax on your distributions over time. With your taxable account, again you are only subject to the capital gains tax (today at maximum 15%), while in a traditional IRA your deductible contributions and growth on the account will be subject to ordinary income tax rates. These rates max out at 35% (in 2012) but could be as high as 39.6% if the rates are increased in 2013 (and possibly higher).

Roth IRA distributions (as long as they’re after age 59½) have no tax at all – and the same goes for non-deductible contributions to your traditional IRA. Of course, since the non-deductible contributions are likely mixed in with growth and deductible contributions, so the non-taxed portions will be pro-rated with the entire distribution.

With all of this in mind – over the longer term it is very important to put as much of your savings as you can into Roth-type accounts, and then as your current tax situation requires, put money into tax-deferred accounts and/or taxable investments. For most folks, in the long run, the taxable accounts prove to be the best option to choose – at least under current tax law.

Posted on Oct 17th, 2012

by author: jblankenship.

Posted in: 2012 tax year, capital gains tax rates, contribution limit, IRA.
Tagged: capital gains and losses · capital gains tax rates · IRA

Errors on Your Tax Return? Here’s How to Fix Them

Oct 15th, 2012

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Often we discover long after filing that we’ve made errors on our tax returns. And too often the idea of resolving the problem seems too daunting to undertake, so we ignore it, deciding to just let things go. This can cause problems if it turns out that the error results in additional tax owed – so it is usually in your best interests to fix the error and go on with your life. On the other hand, if the error resulted in paying too much tax, you should get what you rightfully deserve (in terms of the overpaid tax.)

Recently the IRS published their Summertime Tax Tip 2012-05 which details tips on how to resolve these errors on your tax return. The actual text of the tip follows:

IRS Offers Tips on How to Fix Errors Made on Your Tax Return

If you discover an error after you file your tax return, you can correct it by amending your return. Here are 10 tips from the Internal Revenue Service about amending your federal tax return:

1. When to amend a return. Generally, you shoudl file an amended return if your filing status, number of dependents, total income, tax deductions or tax credits were reported incorrectly or omitted. Additional reasons for amending a return are listed in the instructions.

2. When NOT to amend a return. In some cases, you do not need to amend your tax return. The IRS usually corrects math errors or requests missing forms – such as Forms W-2 or schedules – when processing an original return. In these instances, do not amend your return.

3. Form to use. Use Form 1040X, Amended US Individual Income Tax Return, to amend a previously filed Form 1040, 1040A, 1040EZ, 1040NR or 1040NR-EZ. Make sure you check the box for the year of the return you are amending on the Form 1040X. An amended tax return cannot be filed electronically.

4. Multiple amended returns. If you are amending more than one year’s tax return, prepare a separate 1040X for each return and mail them in separate envelopes to the appropriate IRS processing center (see “Where to File” in the instructions for Form 1040X). Note from jb: often when you need to file an amendment for a return prior to the most recent year, the amendment may have an impact on the subsequent returns, requiring additional amendments to be filed.

5. For 1040X. The Form 1040X has three columns. Column A shows original figures from the original return. Column B shows the changes your are making. Column C shows the corrected figures. There is an area on the back of the form to explain the specific changes and the reasons for the changes.

6. Other forms or schedules. If the changes involve other schedules or forms, attach the corrected form(s) or schedule(s) to the Form 1040X. Failure to do so will cause a delay in processing.

7. Additional refund. If you are amending your return to get an additional refund, wait until you have received your original refund before filing Form 1040X. You may cash that check while waiting for any additional refund.

8. Additional tax. If you owe additional tax, you should file Form 1040X and pay the tax as soon as possible to limit interest and penalty charges.

9. When to file. Generally, to claim a refund, you must file Form 1040X within three years from the date you filed your original tax return or within two years from the date you paid the tax, whichever is later.

10. Processing time. Normal processing time for amended returns is 8 to 12 weeks.

Posted on Oct 15th, 2012

by author: jblankenship.