As we’ve discussed here previously, one of the requirements to enable an inherited IRA to be “stretched” over the lives of the beneficiaries is that all of the beneficiaries must be individuals. That is to say, none of the beneficiaries can be something other than a person, such as a trust (specifically a trust that is not a see-through trust), a charity, or an estate. If even one beneficiary is not a person, then all of the beneficiaries must take distribution within five years. But there’s a way around this, and it has to do with the timing of distributions. When an IRA owner dies, there is a key date to know: September 30 of the year following the year of death of the owner. On that date, the beneficiaries are “set” for the IRA, and if available, the Designated Beneficiary is named. It is on this date that the […]
IRA
When is a RMD a RMD?
I receive quite a few questions from folks looking for clarification on the rules around Required Minimum Distributions upon reaching age 70½, so I thought I’d jot down a couple of facts about them that you may find interesting. When can I take the distribution? Looking through some notes from readers I found one where it was asked (this is paraphrased for clarity): My birthdate is April 10, 1943, so I will reach age 70½ on October 10, 2013. Do I need to wait until October 10 or after to take a distribution so that it is counted as my RMD? I responded to this question by saying that, to be safe, I suggest the reader wait until after October 10 to take the distribution. However. (there’s always a however in life, isn’t there?) I subsequently received a message from a reader (thanks, TAM!) with the following updated information: It […]
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The Qualified Terminable Interest Property (QTIP) Trust
Often we come up against situations in planning finances for folks where some special tools are necessary. One of those situations, quite common these days, is when one or both members of a couple has children by a prior marriage. The situation brings about some interesting questions when considering how the marital assets will be divided when one member of the couple has passed on. Daryl has three children by a prior marriage, and his wife Toni also has three children by a prior marriage. Both Daryl and Toni have considerable assets from before their marriage – each has a investments and retirement accounts in their own name: Toni’s accounts are worth $350,000, and Daryl’s accounts are worth $300,000. Given their lifestyle, they will not be needing much of their accounts early in retirement – but it’s quite likely that later in life they may need the accounts for medical […]
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Book Review: How to Retire Happy
“The 12 most important decisions you must make before you retire” Author Stan Hinden, who is the former syndicated Washington Post “Retirement Journal” columnist, has just released his Fourth Edition of this book. The book is Hinden’s commentary and advice, as well as a sort of journal, as he and his wife Sara entered into and have been living in retirement over the past 17 years. Hinden retired in 1996 at the age of 69, at which time he began writing the “Retirement Journal” column. He was nominated for a Pulitzer Prize in Commentary in 1998 for his work. This book is an excellent read for folks who are planning toward retirement or have recently retired. Hinden has organized the process into 12 decisions, some of which include: “Am I Ready to Retire?”, “What Should I Do with the Money in My Company Savings Plan?”, and “Where Do I Want […]
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Exceptions to the 10% Early Withdrawal Penalty from IRAs and 401(k)s
When you take money out of your IRA or 401(k) plan (or other qualified retirement plan, such as a 403(b) plan), if you’re under age 59½ in most cases your withdrawal will be subject to a penalty of 10%, in addition to any taxes owed on the distribution. There are many exceptions to this rule though, and the exceptions are not the same for all types of plans. IRAs have one set of rules, and 401(k)s have another set of rules. The exceptions are always related to the purpose for which the money was withdrawn. The exact same dollars withdrawn do not have to be used for the excepted purpose, just that the excepted expense was incurred. IRA Exceptions It is important to know that all distributions from your traditional IRA are subject to ordinary income tax, but some distributions are not subject to the early withdrawal penalty. The list […]
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Avoid Awkwardness in the Afterlife–Confirm Your Beneficiary Designations
This is a topic that I cover with all clients, and one that I recommend you for everyone with retirement plans and other accounts with beneficiary designations. Too often we think we have the beneficiary designation form filled out just the way we want it, and then (once it’s too late) it is discovered that the form hadn’t been updated recently – and the designation is not what we hoped for. I made this recommendation to a client not long ago. He assured me that he had all of his designations set up just the way he wanted. His wife, sitting next to him in our meeting, asked him to make sure – talk to the IRA custodian and get a copy of the designation as it stands today. A bit miffed about it all, he agreed to do so, and did the next day. Guess what he found – […]
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State Income Tax and Retirement Income
On only a few rare occasions does it make sense to defer money to your 401(k) or other employer sponsored plan instead of a Roth IRA. Those occasions include when your gross income excludes you from contributing directly to a Roth IRA (you can still convert), you are currently at a very high tax rate or the case of when you live in a state where retirement income is excluded from state taxation. Here in Illinois, the current law exempts retirement income from being taxed at the state level. What this means, is that any contributions to a 401(k), 403(b), SEP, SIMPLE and 457 avoid state income taxation. Qualified distributions at retirement are only taxed at the federal level, and then only as income. If you contribute directly to a Roth IRA that money is after-tax money going in. After-tax in this case meaning it’s been already taxed at the […]
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Fixing an IRA With the “Wrong” Beneficiary
Quite often, for many different reasons (often known only to the deceased original owner), the original owner of an IRA designates a beneficiary that the survivors don’t necessarily agree with. It might be that only one of several children is designated, or perhaps additional beneficiaries are designated along with a spouse. In cases like these, there are ways to make changes to the outcome of the inheritance. In this article we specifically deal with the case where only one of four children was designated as the primary beneficiary of the IRA. To resolve the situation, let’s consider the following IRA: John, the decedent, designated April (his daughter) as the primary beneficiary of his IRA. It isn’t known why John only designated April as the beneficiary, as he has three other children – Bill, Chuck, and Dale – and John had only his IRA as an asset to pass along to […]
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Last-Minute Tax Tips
Since today is D-Day for income tax filing, I’ve pulled together a few recent tips that the IRS published. These tips cover a few of the areas that you may find interesting, including how to get a six-month extension for your filing (but not for payment of tax), errors to avoid as you complete your tax return, how to make IRA contributions, and tips for the self-employed at tax time. This is a much longer post than I normally write, but I think it has a lot of very good and very timely information that will be useful today. The actual text of these tips are listed below, with the reference number of each tip. IRS Newswire IR-2013-38 Can’t File by April 15? Use Free File to Get a Six-Month Extension; E-Pay and Payment Agreement Options Available to People Who Owe Tax WASHINGTON – The Internal Revenue Service today […]
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A Few Facts to Know About Retirement Plan Contributions
As we near the tax filing deadline, there are a few things you need to be aware of as you consider your retirement plan contributions for tax year 2012 (or whatever the prior tax year is, if you’re reading this sometime later). Regular IRA contributions are due by the filing deadline, with no extensions. That means April 15, 2013 for the 2012 tax year. Your contribution for 2012 is considered made “on time” if your payment is postmarked by midnight on April 15, 2013. Perhaps you wish to make a more substantial contribution to a retirement plan – in 2012, you can contribute up to $50,000 to a Keogh plan. That amount is limited to 20% of the net self-employment income, or 25% of wage income if the individual is an employee of the business. Keogh plan contributions can be made by the extended due date of your return – […]
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How an IRA is Treated When a Beneficiary Dies
When an IRA owner dies while the IRA still has funds in it, the primary beneficiary(ies) have the opportunity to transfer the account to an inherited IRA and begin taking the Required Minimum Distributions (RMDs) over his or her lifetime. When this primary beneficiary dies, it can be difficult to figure out who the money goes to. This is known as the successor beneficiary. It’s important to know the difference between a successor beneficiary and a contingent beneficiary. A contingent beneficiary takes the place of the primary beneficiary in the event that the primary beneficiary dies before the original owner does. A successor, on the other hand, takes the place of the primary beneficiary when the primary beneficiary outlives the original owner. So it’s a matter of timing. What we’re interested in is the successor beneficiary. There are four main ways that a successor beneficiary is determined: Successor is named […]
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Social Security Benefits and Taxes
When you’re receiving Social Security benefits, you may be subject to income tax on those benefits. At the end of the year, you’ll receive a form SSA-1099 from the government that details the benefits that you’ve been paid, as well as the amount that has been deducted for Medicare premiums, and any federal income tax that you’ve had withheld from the benefit checks. When you prepare your tax return for the year, if you’re using a software program (does anyone prepare them by hand any more?), the program will give you a place to enter the figures from your SSA-1099 form. Then after you’ve entered all of your other income information into the system, it will calculate how much of your Social Security benefit is subject to income tax. But that’s no fun, is it? How do you know how much of your benefit is going to be taxable? Here’s […]
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Don’t Forget to Pay Tax on Your 2010 Roth Conversion
Remember back in those heady days in 2010, when you finally had carte blanche eligibility to convert your IRA funds to a Roth IRA regardless of your income? And then there was a special provision that the IRS made available: you could convert money to your Roth IRA in 2010, and delay recognizing the income and paying the tax over the next two years… remember that? That was so cool. However. (Ever notice how there’s always a “however” in life?) Here we are, two years later, and NOW you have to pay tax on the Roth conversion that happened way back then. You might have forgotten it altogether, but you can bet the IRS hasn’t forgotten. Hopefully you didn’t forget this on your 2011 tax return that you filed in 2012 as well. At that time, you should have recognized half of the deferred Roth IRA conversion from 2010 on […]
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Pros and Cons of the Roth 401(k)
The Roth 401(k) first became available in January 2006, is an option available for employers to provide as a part of “normal” 401(k) plans, either existing or new. The Roth provision allows the employee to choose to direct all or part of his or her salary deferrals into the 401(k) plan to a separate account, called a Designated Roth Account, or DRAC. The DRAC account is segregated from the regular 401(k) account, because of the way the funds are treated. When you direct a portion of your salary into a DRAC, you pay tax on the deferred salary just the same as if you had received it in cash. This deferred salary is subject to ordinary income tax, Medicare withholding, and Social Security withholding if applicable. The unique thing about your DRAC funds is that, upon withdrawal for a qualified purpose (e.g., after you have reached age 59½, among other […]
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How Dollar-Cost-Averaging Can Work to Your Advantage for Your 401(k)
When you invest in your 401(k) plan with salary deferrals from each and every paycheck, you are taking part in a process known as Dollar-Cost-Averaging (DCA). This process can be advantageous when investing periodically over a long span of time, by smoothing out the volatility of the market and giving you an average cost of your investment shares over time. How does this work, and how can it be advantageous? Dollar-Cost-Averaging When deferring income with each paycheck, typically you will be investing in your 401(k) plan each pay period, whether monthly, bi-weekly, or weekly. Each pay period the same amount is deferred and invested, no matter what the price of the underlying investments are at the time. Since you’re always putting the same amount into the investment, when the price of the shares is higher, you purchase fewer shares; when the price is lower, you are purchasing more shares. Note: […]
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Qualified Charitable Contributions From Your IRA in 2012 and 2013
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, […]
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2013 MAGI Limits for IRAs – Married Filing Jointly or Qualifying Widow(er)
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 […]
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Receive a Tax Credit For Saving
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: […]
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Pay Yourself First
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 […]
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Another Good Reason to Delay Social Security Benefits
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 […]
Sterling Raskie, MSFS, CFP®, ChFC®
The latest in our Owner’s Manual series, A 401(k) Owner’s Manual, was published in January 2020 and is available on 
A Medicare Owner’s Manual, is updated with 2020 facts and figures. This manual is available on 
Social Security for the Suddenly Single can be found on Amazon at 
Sterling’s first book, Lose Weight Save Money, can be 
An IRA Owner’s Manual, 2nd Edition is available for purchase on Amazon. Click the link to choose the 
Jim’s book – A Social Security Owner’s Manual, is now available on Amazon. Click this link for the 
And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.