Search Results for: required minimum distributions

Required Minimum Distributions – 7 Things You Need to Know

June 11, 2021 by Roger Wohlner 11 Comments

The first wave of Baby Boomers hitting age 70 ½ began in 2017. This was the age when required minimum distributions had to begin for those turning 70 ½ on or before December 31, 2019. The SECURE Act, passed at the end of 2019 has raised the age to begin RMDs to 72 beginning on January 1, 2020. RMDs need to be taken from IRAs, 401(k)s and other retirement accounts.

Here are 7 things you need to know about required minimum distributions.

The penalties can be steep

The rules were changed a number of years ago to require custodians such as Schwab and Fidelity to report the amount of your annual required minimum distribution to the government. In the past this had not been the case. This was part of an effort to enforce the taking of these distributions and the payment of the taxes associated with them. The penalty for not taking an RMD is steep, 50% of the amount not taken in addition to paying the taxes due.

As an example, if your RMD is $20,000 and you don’t take it you would owe a penalty of $10,000 on top of the taxes associated with the $20,000 distribution from your retirement account.

Be aware of the total required minimum distribution

If you have multiple retirement accounts you will likely receive a separate RMD amount for each account. Note that the total of your required minimum distributions is what counts, you can generally take the entire amount of the distribution all from one account or from some or all of your various accounts as long as the total amount taken is correct. There are exceptions to this, so be sure to check with your custodian or a qualified tax or financial advisor to ensure you take the correct amounts for all accounts as required.

Timing matters

Your first required minimum distribution will be for the year in which you turned 70 ½ for those who reached this age on or before December 31, 2019. For example, if you turned 70 on January 1, 2019 you would be 70 ½ on July 1, 2019 and you would have a required distribution for calendar year, 2019.

If your 70th birthday was September 1, 2019, your first distribution is not required until the year you turn 72, which would be 2021.

For your initial RMD only, you are not required to take the distribution until April 1 of the calendar year following the year in which you turn 70 ½ or now 72. For the someone who turned 70 on January 1, 2019 that would be April 1, 2020, for someone reaching age 72 on September 1, 2020 their initial RMD could be deferred until April 1, 2021.

However, all subsequent RMDs must be taken by December 31 of the appropriate year. Delaying the initial distribution until April 1 of the following calendar year would mean that you would be taking two distributions and paying taxes on both for the same calendar year. Often for this reason I suggest taking the first distribution in the year that it applies to, for example by December 31, 2019 in the January 1, 2019 birthday example.

How on earth is this calculated?

Your required minimum distribution for a given year is calculated based upon your age and the total of your retirement account(s) at December 31 of the prior year. The calculation is based upon the tables in IRS Publication 590.

For example if you are 75, married with a spouse who is not more than 10 years younger than you, and your IRA account balance was $500,000 at the end of 2019, your RMD for 2020 would be approximately $21,834 using the table. I generally rely on calculations by the custodian for a number of reasons, but it is always a good idea to double check. There are a number of online RMD calculators including this one.

Required minimum distributions are not always required

If you are 70 ½ or older (or 72 or older for those to whom that age applies) and still working, there is a specific exception to the RMD rule. This pertains only to the 401(k) or similar retirement plan of your current employer. Additionally, it only applies if you are less than a 5% owner of the company. If both conditions are satisfied you do not have to take an RMD on that plan. Any other IRAs, an old 401(k), or similar accounts will still have a required minimum distribution. Your company must elect to offer this exception, so it is best to check with your retirement plan administrator if you are in this situation.

Inherited IRAs and required minimum distributions

Note the rules below are for inherited IRAs that were inherited by non-spousal beneficiaries on or before December 31, 2019. The SECURE Act changed the rules, in some cases, for non-spousal beneficiaries so the explanation below will no longer apply in many cases for new inherited IRAs for non-spousal beneficiaries on or after January 1, 2020. More on this in a future post.

Inherited IRAs are a specific type of account that usually comes into play with a non-spousal beneficiary. As an example, a parent who is a widow or widower might leave their IRA account to their adult children.

Let’s say the mother is a widow with a $100,000 IRA and she names each of her two adult children as beneficiaries. Upon her death each child would have some options including setting up an inherited IRA account which has some specific rules.

If the mother had already started taking required minimum distributions from her IRA, then the children would need to continue taking RMDs from their inherited IRA accounts. However, their distributions would be based upon their life expectancy tables resulting in smaller distributions then would have been required by their mother. This allows the kids is to preserve and grow the inherited IRA account.

Roth IRAs and required minimum distributions

One of the major benefits of a Roth IRA account is that the owner is not required to take required minimum distributions. This might be a factor among many in deciding whether a Roth IRA is the right way to go.

Note inherited Roth IRAs have different rules for non-spousal beneficiaries. If this is your situation you should contact a financial advisor who understands this issue.

Certainly, this list is not an exhaustive list. Required minimum distributions play an important part in both your retirement planning and potentially your estate planning. If you have questions, make sure you contact a tax or financial advisor who understands this complex area, especially with some new rules under the SECURE Act now in place.

In or approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Filed Under: Retirement Tagged With: 401(k), Financial Planning, Individual Retirement Account, IRA Required Minimum Distributions, Required Minimum Distributions, retirement, Retirement planning, RMD

Health Savings Accounts – The Other Retirement Plan

November 20, 2022 by Roger Wohlner 14 Comments

Saving for retirement is a major undertaking for most of us. Increasing healthcare costs and longer life expectancies make the hill a bit steeper to climb each year. Health savings accounts (HSA) provide another vehicle to save for retirement.

Many of you have the option to enroll in high-deductible insurance plans that allow the use of a health savings account via your employer. An HSA can serve as an additional retirement savings vehicle on top of your IRA or 401(k) to help cover healthcare and other retirement expenses.

The rising cost of healthcare in retirement

According to Fidelity an average couple aged 65 will need to have $315,000 accumulated to cover medical costs in retirement. This is up from prior year’s estimates including $285,000 in 2019, $275,000 in 2017 and from $220,000 in 2014. The estimate was $190,000 in their 2005 survey.

This is a significant amount even for retirees with a retirement nest egg in excess of $1 million.

High deductible health insurance plans

Health insurance plans with an annual deductible of at least $1,4000 for a single person and $2,800 for a family qualify for use with HSAs in 2022, These limits increase to $1,500 and $3,000 for 2023. These types of plans are becoming more common with employers and are available privately as well. Premiums are generally less expensive than plans with lower deductibles. Out-of-pocket expenses for high deductible plans cannot exceed maximums of $7,050 for an individual and $14,100 for family coverage in 2022, increasing to $7,500 and $15,000 for 2023.

How the HSA works

HSA accounts can only be used in conjunction with a high-deductible health insurance plan. The HSA will be a separate medical savings account into which the employee or private policy holder can contribute money during the year. The money goes into the account on a pre-tax basis much like a traditional 401(k) or IRA. This is a great opportunity for those who earn too much to make pre-tax contributions to a traditional IRA. Those who have made the maximum contributions to their 401(k) have another pre-tax savings option available to them as well.

The HSA contribution limits for 2022 are $3,650 for individuals and $7,300 for families. These limits increase to $3,850 and $7,750 for 2023. Those who will be 55 or older at any point during the year are eligible to contribute an extra $1,000 in 2022, this remains unchanged in 2023. Some employers may also make contributions to employee’s accounts.

Money can be withdrawn tax-free from the HSA account to pay for a variety of qualified medical expenses. Withdrawals used to pay for non-qualified medical costs will be included in your gross income and included in your taxable income. Withdrawals for non-qualified expenses may also be subject to a penalty.

The real advantage is that money not used to cover eligible expenses can also be left in the account from year-to-year. This differs from a Flexible Spending Account (FSA) where all money must be used by the end of the year in conjunction with qualified medical expenses. Any unused dollars are lost to you.

The money in the HSA is portable when you leave an employer. Many banks and investment custodians offer HSA accounts, some with investment options that are similar to an IRA account. The investments chosen should reflect your risk tolerance and time horizon for the money. Just like an IRA account you should shop around for the HSA account that best meets your needs including investment options and fees.

Qualified medical expenses

Examples of qualified medical expenses include:

Health insurance coinsurance and deductibles
Most medical and dental expenses
Vision care
Prescription drugs and insulin
Medicare premiums
A portion of the premiums for a tax-qualified long-term care policy

These are just some examples of qualified medical and related expenses for which HSA funds can be used on a tax-free basis.

Health Savings Accounts and retirement

For those who can afford to cover some or all of their out-of-pocket medical costs from other sources while they are working, HSA contributions can serve as an excellent supplement to their other retirement savings in accounts like IRAs and 401(k)s.

Money in the HSA can be saved until retirement to cover qualified medical costs. This can make your retirement savings go farther. Remember the money comes out tax-free for qualified medical expenses.

Beyond medical expenses, once you reach age 65 the money can be withdrawn penalty-free for purposes other than paying for qualified medical expenses, though the withdrawals will be taxed as ordinary income rates like a traditional IRA account.

HSAs are not subject to required minimum distributions, allowing the HSA to continue to grow tax-free. If a spouse is named as the beneficiary of the account, he or she can inherit the money tax-free. Non-spousal beneficiaries will be taxed on the account’s fair market value.

Your HSA can be another leg on the retirement planning stool.

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The Bottom Line

With the cost of healthcare in retirement continuing to increase, the health savings account is increasingly being viewed as an additional retirement account. If you have access to one, consider funding an HSA account to help supplement your other retirement savings efforts.

Photo by Bill Oxford on Unsplash

Approaching retirement and want another opinion on where you stand? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Filed Under: Retirement Tagged With: Health savings account, retirement, Retirement planning

401(k) Options When Leaving Your Job

January 28, 2020 by Roger Wohlner 12 Comments

Perhaps you are retiring or perhaps you are moving on to another opportunity. Perhaps you were downsized. Whatever the reason, there are many things to do when leaving a job. Don’t neglect your 401(k) plan during this process.

With a defined contribution plan such as a 401(k) you typically have several options to consider upon separation. Here is a discussion of several 401(k) options when leaving your job and the pros and cons of each. Note this is a different issue from the decision that you may be faced with if you have a defined benefit pension plan.

Leaving your money in the old plan

I’m generally not a fan of this approach. All too often these accounts are neglected and add to what I call “financial clutter,” a collection of investments that have no rhyme or reason to them.

In some larger plans, participants might have access to a solid menu of low cost institutional funds. In addition, many of these plans tend to be among the cheapest in terms of administrative costs. If this is the case with your old employer’s plan, it might make sense to leave your account there. However, it is vital that you manage your account in terms of staying on top of changes in the investment options offered and that you reallocate and rebalance your account when applicable.

Unfortunately far too many lousy 401(k) plans are filled with high cost, underperforming investment choices and leaving your retirement dollars there may not be your best option.

Rolling your account over to an IRA

This route not only allows for the consolidation of accounts which makes monitoring your portfolio easier, but investors often have access to a wider range of low cost investment options than might be available to them via their old employer’s plan.

Even for do it yourself investors, rolling over to an IRA is often a good idea for similar reasons. You will want to take stock of your overall portfolio goals in light of your financial plan to determine if the custodian you are using or considering to offers a range of appropriate choices for your needs.

Rolling your account into your new employer’s plan

If allowed by your new employer’s plan, this can be a viable option for you if you are moving to a new job. You will want to ensure that you consult with the administrator of your new employer’s plan and follow all of their rules for moving these dollars over.

This might be a good option for you if your 401(k) balance is small and/or you don’t have significant outside investments. It might also be a good option if your new employer has an outstanding plan on the order of what was mentioned above.

Before going this route, you will want to check out your new employer’s plan. Is the investment menu filled with solid, low cost investment options? You want to avoid moving these dollars from a solid plan at your old employer to a sub-par plan at your new company. Likewise, you don’t want to move dollars from one lousy plan to another.

Other considerations

A fourth option is to take a distribution of some or all of the dollars in your old plan. Given the potential tax consequences I generally don’t recommend this route.

A few additional considerations are listed below (I mention these here to build your awareness, but I am not covering them in detail here. If any of these or other situations apply to you, I suggest that you consult with your financial or tax advisor for guidance.):

The money coming out of the plan is always taxable, except for any portion in a Roth 401(k) assuming that you have satisfied all requirements to avoid taxes on the Roth portion.
You will likely be subject to a penalty if you withdraw funds prior to age 59 ½ with some exceptions such as death and disability.
There is also a pretty complex method for those under age 59 ½ to withdraw funds and avoid the penalty called 72(t). Additionally, there are complex rules for those who are 55 and older who wish to take a distribution from their 401(k) upon separating from their employer. In either case consult with a financial advisor who understands these complex rules before proceeding.
If your old plan offers a match there is likely a vesting schedule for their matching contributions. Your salary deferrals are always 100% vested (meaning you have full rights to them). Matching contributions typically become vested on a schedule such as 20% per year over five years. You will want to know where you stand with regard to vesting anyway, but if you are close to earning another year of vesting you might consider this in the timing of your departure if this is an option and it makes sense in the context of your overall situation.
If your company makes annual profit sharing contributions, they might only be payable to employees who are employed as of a certain date. As with the previous bullet point, it might behoove you to plan your departure date around this if the amount looks to be significant and it works in the context of your overall situation.
Another factor that might favor rolling your old 401(k) to your new employer’s plan would be your desire to convert traditional IRA dollars to a Roth IRA now or in the future via the use of a backdoor Roth. There could be a tax advantage to be had by doing this, please consult with your financial advisor here for guidance tailored to your unique situation.
If you are 72 or older (or had been subject to required minimum distributions under the old rules prior to the SECURE Act) and still working, you are not required to take annual required minimum distributions from your 401(k) as long as you are not a 5% or greater owner of the company and if your employer has made this election for their plan. This applies only to the retirement plan of your current employer, you are subject to any RMDs that would apply to IRAs or old 401(k) plans with former employers. This might also be a reason to consider rolling your old 401(k) or even an IRA to your new employer’s plan if they accept these types of rollovers, again consult with your financial advisor.

There are a number of 401(k) options when leaving your job. The right course of action will vary based upon your individual circumstances. The wrong answer is to ignore this decision.

Approaching retirement and want another opinion on where you stand? Need help deciding what to do with your retirement plan when leaving a job? Not sure if your investments are right for your situation? Need help getting on track? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Photo credit: Flickr

Filed Under: 401(k) Tagged With: 401(k), Pension, retirement, Retirement planning, Roth IRA

SALT and Your Taxes

January 19, 2020 by Roger Wohlner Leave a Comment

One of the big topics again this tax season is SALT. This is not a seasoning for food, but rather SALT stands for state and local taxes. The treatment of these expenses in terms of their deductibility for those who itemize was a major change beginning with the 2018 tax year, arising out of the Tax Cut and Jobs Act passed at the end of 2017.

What is SALT?

As mentioned above this includes state and local taxes. In most cases the biggest components will be your state income tax, state and local sales taxes and the real estate taxes on your home.

The SALT cap

Beginning with the 2018 tax year, SALT taxes have been capped at $10,000 as an itemized deduction. This represents a significant reduction for many taxpayers compared to prior years. Those in states with high state income taxes and areas with high real estate taxes will likely feel the greatest impact.

Our latest real estate tax bill alone has put us over the cap limit. The state income tax rate for Illinois stands at 4.95%. As with the 2018 tax year, his means that none of the state income taxes on income earned by my wife and I will be eligible as an itemized deduction for 2019 and beyond. These rules extend through the 2025 tax year.

Fewer taxpayers can itemize

One estimate indicated that the number of itemizers would drop from about 46.5 million in 2017 to about 18 million in 2018. The increase in the standard deduction is another major change impacting the ability to itemize along with the SALT cap.

For those filing married and joint the standard deduction increased from $12,740 to $24,000 for 2018. For the 2019 tax year this increases to $24,400, it increases to $24,800 for 2020.
For single filers the standard deduction increased from $6,350 to $12,000. For the 2019 tax year this increases to $12,200, it increases to $12,400 for 2020.

This means for those with itemized deductions less than these amounts it makes financial sense to just take the standard deduction.

What impact does the SALT cap have on your taxes?

Beyond whether or not you can still itemize deductions, you will need to determine the effect of the SALT cap and other changes under the new rules on your overall tax situation.

For example, a married couple might have previously been able to claim $18,000 in itemized deductions prior to the new rules. Now with the SALT cap, their itemized deductions will be lower, and they will be forced to claim the standard deduction. However, the $24,400 standard deduction for 2019 likely provides a greater benefit than the amount they itemized in prior years.

Other factors to consider:

Tax rates are generally lower than in prior years starting with 2018.
Some businesses and the self-employed might be eligible for a pass-through deduction of 20% of their business income in some cases. In our case this will be helpful to our situation for 2018 and will be again in 2019.
The income limits on the child-care credit have been increased allowing more parents to take advantage of this credit. Remember a direct credit on your taxes is worth more than a deduction in income.
The alternative minimum tax will impact fewer taxpayers than in past years due to changes in the income limits.
Along with the increase in the standard deduction, the personal exemption has been repealed under the new rules. This was worth $4,050 per person in 2017.

The point is the SALT cap will impact each of us differently depending upon our situation.

The impact on real estate

Some have said that the SALT cap was retribution to those in “blue” states that didn’t support the president in the last election. I’ll leave that to you the reader to decide.

This cap disproportionately impacts states with high state income taxes and relatively high real estate values. According to one study, New York, New Jersey, Connecticut, California and Maryland were the top five states in terms of the deduction for SALT as a percentage of taxpayer’s AGI (adjusted gross income) in 2016.

The inability to fully deduct property taxes and mortgage interest will make the after-tax cost of buying a home in high cost areas more expensive. Some have speculated that the cap on the ability to deduct these taxes might influence decisions about where people live and potentially cause some people to relocate to lower tax, lower cost states. It could also have an impact on the level of housing starts in these high cost areas, and the fortunes of home builders and related industries.

Planning around the SALT cap

Most of the changes enacted as part of the Tax Cut and Jobs Act expire after the 2025 tax year, so the SALT cap will be around for a few years. Here are some planning considerations.

Bunch deductible expenses. This could involve deferring or accelerating expenses that are eligible for itemizing into one year to get you over the standard deduction threshold. A couple of examples:

Bunch your charitable contributions in to a single year. If you were going to make say $5,000 in contributions over several years, bunch all or as much of that amount as possible into a single year if it will help you to reach the level where you will be able to itemize.
Same thought process as above with elective medical expenses. If there is a procedure or other elective expense, plan to incur it in the year that is most beneficial tax-wise if possible.

Consider directing some of your RMD to charity. For those who are taking required minimum distributions from their retirement accounts, consider using the QCD (qualified charitable deduction) to contribute some or all of your RMD to a qualified charity. There is no charitable deduction, but the amount of the QCD is not subject to federal taxes.

Max out your retirement plan contributions. This has nothing to do with itemized deductions, but this can provide the double benefit of a larger tax break if you aren’t currently doing this along with the added savings for retirement. If your company offers a 401(k) or similar plan be sure that you are contributing as much as possible. If you are self-employed be sure that you have a retirement plan set-up and that you are contributing as much as possible as well.

Review your mortgage and real estate situation. It may behoove you to pay down your mortgage if you can, especially if you can no longer itemize. If you are looking at buying a new home, be sure to take the SALT cap into account when calculating the after-tax cost of ownership.

The Bottom Line

Tax season is a good time to take a look at your tax situation not only for last year but also going forward. Be sure to consult with a qualified tax or financial professional to help you review your situation as needed.

Need help looking at your overall financial plan and want another opinion on where you stand? Not sure if your investments are right for your situation? Concerned about stock market volatility? Check out my Financial Review/Second Opinion for Individuals service for detailed guidance and advice about your situation.

NEW SERVICE – Financial Coaching. Check out this new service to see if it’s right for you. Financial coaching focuses on providing education and mentoring on the financial transition to retirement.

FINANCIAL WRITING. Check out my freelance financial writing services including my ghostwriting services for financial advisors.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

Filed Under: Financial Planning Tagged With: Financial plan, itemized deductions, SALT, tax reform

New IRA Rules and Time-Tested Strategies

January 14, 2015 by Roger Wohlner 1 Comment

With the start of a new year IRA season is under way. Over the next few months you will be inundated with ads by major financial services firms to open and contribute to an IRA with them. As far as part about opening an account and/or making a contribution this is a good idea for many of us.

Here is an update about two new IRA rules and some discussion of some time-tested IRA strategies.

New IRA rule – 60 day rollover

IRA account holders and financial advisors need to be aware of a change to the 60 day rollover rule for IRAs. In the past you could take money out of your account and do whatever you wished with it as long as the money went back into the original IRA account or another IRA account within 60 days. You were allowed to do this once every 365 days for each IRA account with no income tax consequences.

A tax-court case last year resulted in a ruling that this once per year tax-free rollover is limited to one IRA account once per 365 day period. So if you have multiple IRA accounts and had planned to use the loophole to do a rollover from more than one account you are now out of luck.

Note this does not apply to a trustee-to-trustee transfer. This means, for example if you have an IRA account at your local bank and wish to transfer this account to a custodian like Fidelity you can do this without the limitation above as long as you have the money transferred between the two entities and you don’t touch the money.

If you have the bank write you a check for the value of your account the 60 day clock starts for you in terms of needing to deposit that check into the new IRA account. And if you have taken a rollover distribution from any IRA account within the last 365 days this is now a taxable distribution. IRA account holders and their financial advisors need to be aware of this rule as violating it can be costly.

The rules for 60 day rollovers for IRAs have changed, violating these rules can be costly.

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New IRA rule – Inherited IRAs

Inherited IRAs can be a great way to pass your IRA account to heirs if there is no spousal beneficiary. A typical example that I’ve seen is using this vehicle to leave the IRA or a 401(k) account to adult children by a parent when they are single via the prior death of their spouse or due to a divorce.

Retirement accounts typically offer protection from creditors. Until a 2014 ruling by the Supreme Court nobody was really sure whether inherited IRAs left to non-spousal beneficiaries were retirement plans or simply just inherited assets that were passed down. The court’s ruling stated that inherited IRAs do not have creditor protection as they are not retirement accounts.

The implications of this will vary. If your heirs are responsible with their money and are not in a high risk profession such as delivering babies or others prone to law suits this rule probably does not have much impact.

IRAs left to a spouse that he or she then makes their own are likely not impacted by this ruling.

IRA expert Ed Slott offered these thoughts in a Bankrate piece via Yahoo! Finance:

“There are some ways to protect heirs from themselves: for instance, by leaving assets to a trust. Leaving an IRA to a trust is more complicated than leaving regular money.

Another option skips the hassle and uncertainty of leaving an IRA to a trust: Take the money out of the IRA and buy life insurance.

“You could leave the IRA to a trust, but that’s complicated because the IRA has distribution rules. So it gets complicated to throw that into a trust; life insurance is a much easier asset to go to a trust,” Slott says. “Spend down some of your IRA, put the rest in a life insurance policy. Leave that to a trust for the kids.”

That way, the kids will end up with tax-free money with no distribution rules attached. Plus the money would be creditor-protected.

That said, IRA owners with smaller accounts shouldn’t go to the trouble. Try to get your kids’ spending under control while you’re still in the pink. “If they blow it, they blow it. What more can you do?” Slott asks.”

My take is that using a trust is a hassle and you should work with an advisor who really understands the pros and cons of this route before doing this. Likewise with life insurance . The asset protection and tax advantages might be there but do they outweigh the cost of the insurance and the often high internal expenses of the policy that will apply to the cash value inside the policy?

Time-tested IRA strategies

IRAs remain a great retirement savings vehicle. Here are a few thoughts and strategies that have stood the test of time.

Open an account and get started. Like anything else this tool doesn’t work unless you have one. The contribution limits remain at $5,500 in 2015 with an additional $1,000 allowed for those 50 and over. You can still make a 2014 contribution up until April 15, 2015.

Choose an IRA custodian carefully. Look at any account fees, the availability of the investment vehicles that you are likely to use, transaction costs to buy and sell investments and perhaps other services outside IRAs offered by this custodian.

Consolidate accounts. If you have multiple IRA accounts make this the year that you look at consolidating these accounts. It will be easier to manage your investments in one account versus multiple accounts. You will eliminate any fees on these other accounts and you might benefit in terms of any transaction fees by having more money with a single custodian.

Do something with your old 401(k) accounts. It is not uncommon for people to have worked at five or more jobs during the course of their career. All too often I see several old 401(k) accounts from former employers just sitting there, neglected. By this I mean that they are not being watched, the investments in the account haven’t been looked at in years, etc. One solution is to roll these accounts into an IRA account. This consolidation can make sense for the reasons mentioned in the last point. It might also make sense to leave the account where it is if the investments offered by the plan are solid and low cost. Likewise, if applicable, it can make sense to roll these balances into a new employer’s plan. Whatever the right answer come up with that answer and act on it.

Invest your IRA as part of an overall strategy. Don’t invest your IRA account in a vacuum. This and all investment accounts should be a part of an overall investment strategy ideally based upon your financial plan.

Don’t forget your required minimum distributions. If this applies to you be sure to take these distributions by the deadline. Failing to do so can result in a hefty penalty. If you have multiple IRA accounts pay attention to all of them. Holders of inherited IRAs might not benefit from their custodian calculating the RMD as is the case with regular IRAs. Nonetheless they are still required if they apply to your situation. RMDs might also apply to a 401(k) with an old employer as well.

Make sure your beneficiary designations are up to date. As part of your estate planning efforts IRA accounts will pass to your heirs via a beneficiary designation which overrides anything that you might have in a will. This also applies to other retirement accounts, annuities and life insurance policies as well. Nothing says “I love you…” to your spouse quite like them finding out that you never changed the beneficiary designation on your $1 million IRA account from your ex-spouse after the divorce. Were this to be the case your current spouse would likely be out of luck.

The Bottom Line

IRAs can offer many advantages to retirement savers. Traditional and Roth accounts are both excellent vehicles depending upon your situation. It is important to select the right IRA custodian.

New rules for the 60 day rollover and inherited IRAs should be noted and you should understand the consequences, if any, for your situation.

Most of all make sure you are managing existing IRA accounts to their fullest potential. Also if an IRA contribution makes sense for you there is no time like the present to get started.

Filed Under: IRAs Tagged With: 401(k), Ed Slott, Financial plan, Individual Retirement Account, retirement, Roth IRA, Traditional IRA

10 Planning Steps to Take Within 10 Years of Retirement

January 8, 2015 by Roger Wohlner 7 Comments

The ten years prior to retirement are when a lot of people start to take a hard look at their retirement readiness. This makes sense as you are likely in a position to make some decisions about what your retirement lifestyle will look like. This is also a good point to deal with any retirement shortfalls while there is still some time to make adjustments. Here are 10 planning steps to take within 10 years of retirement.

Maximize your retirement savings

The 10 years prior to retirement will be among the highest income years of their careers for many retirement savers. This is a time to maximize your contributions to your 401(k) plan, to IRAs or to a self-employed retirement plan. While these contributions will not have the years to compound as those made in your 20s and 30s, these late career retirement contributions are still important.

Review Social Security

While there are concerns as to the solvency of Social Security, it’s likely those currently within 10 years of retirement will receive their benefits. You should get your latest Social Security statement and check your benefits here. The Social Security Administration has also indicated that they will resume mailing statements as well. Save them, and always review them to ensure that you have received full credit for all of your earnings.

It is important to know and understand the implications of claiming benefits at various ages. If you are married there are a number of strategies to consider in terms of the timing of claiming your benefits. This is the time to start thinking about when you might begin taking your benefits.

Get your arms around all retirement accounts

It is not uncommon for someone to have worked at five or more jobs over the course of their career. This can result in a number of old retirement accounts with former employers and elsewhere. If you are married and your spouse works this number can easily double.

Additionally I’ve seen people with old pensions in which they have a vested benefit. Add to this a couple of IRA accounts and perhaps that annuity your college roommate convinced you to buy and you might have a disorganized mess. This is a good time to make sure that you have a list of all of these old plans and accounts. It’s an even better time to develop a strategy to make sure that old 401(k) and IRA accounts are consolidated and being properly invested and that your old employer has your current contact information regarding any old pension accounts. While many of these old accounts might be relatively small, they can add up to some real money when combined.

Figure in our other financial resources

It is important to get your arms around your other assets that will be available to support your retirement lifestyle. Here are a few items to consider among others:

Taxable investment accounts
Annuities
Life insurance with cash value
Interest in a business
Stock options from your employer

Note if your 401(k) account contains company stock you might benefit from the use of the Net Unrealized Appreciation (NUA) rules.

Determine if your company offers retiree health insurance. If they do make sure you understand how much coverage will cost and how the benefits work. In many cases the coverage may differ from what is offered to active employees and cover may be more expensive.

Take the money and run

It’s not uncommon for companies to offer incentives for employees to take an early retirement. If you are the recipient of such an offer consider taking it on two counts. First, the offer might be quite financially attractive, and second, if you don’t take the initial offer the next such offer in most cases is not nearly as lucrative. And make no mistake, after that first offer you likely are “on the list,” so to speak.

Develop a retirement budget

This is the time to start thinking about how you will live in retirement and how much this lifestyle will cost. In other words this is the time to develop a retirement budget.

Do a Retirement Projection

There are many retirement calculators available online, perhaps even through your company’s retirement plan provider. Some are better than others so do a little checking in terms of the methodology and the underlying assumptions. Even the best ones are only tools that provide guidance but not definitive answers.

Most calculators will ask you to input your retirement assets, pensions and Social Security, other investments, etc. You can generally vary things such as your asset allocation and your spending level to get a range of outcomes and probabilities of success (which is generally defined as not running out of money). While you may or may not like the answers, it is far better to know you have a potential shortfall as early as possible prior to retirement while you can still make some adjustments.

Think about how you will take your money

One of the more complex and important things to manage during retirement is a withdrawal strategy. Which accounts will you tap and in which order? Different types of accounts will have different income tax consequences. Traditional IRA account and 401(k) account withdrawals are generally taxed as ordinary income. Roth IRA accounts will generally not be taxed as long as certain rules are followed. Additionally required minimum distributions may come into play as well.

Besides retirement accounts, annuities have their own tax rules as do appreciated taxable investments. The point is that the rules can be complex and making poor choices can cost you money that could be put towards your desired retirement lifestyle.

Poke holes in your plan

Perhaps you are on top of your retirement and have a plan in place. Give some thought as to what could go wrong, what could derail your retirement plans. What happens if you suffer a serious medical setback that causes you to stop working sooner than planned? What if you are laid off before you are ready to retire? What impact would events like these have on your ability to retire as planned?

Hire professional help if you need it

This is a good time to engage the services of a competent financial advisor to assist you. Besides their expertise, a qualified advisor can add a detached third-party perspective to your retirement planning.

The Bottom Line

The 10 years leading up to retirement are a critical time to get a handle on all of your resources for retirement including Social Security, pensions, retirement accounts, and other assets. Determine if you are on track towards your desired retirement lifestyle and if you see a shortfall this is the time to make adjustments. If you need the help of a financial professional, get it. Retirement success takes planning and this time period is crucial to help ensure a successful retirement.

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Filed Under: Retirement Tagged With: 401(k), Individual Retirement Account, Mutual fund, retirement, Retirement planning, Roth IRA

8 Year-End Financial Planning Tips for 2014

December 5, 2014 by Roger Wohlner 2 Comments

When I thought about this post I looked back at a post written about a year ago cleverly titled 7 Year-End 2013 Financial Planning Tips. The year-end 2014 version isn’t radically different but it’s also not the same either.

Here are 8 year-end financial planning tips for 2014 that you might consider:

Consider appreciated investments for charitable giving

This was a good idea last year and in fact always has been. Many organizations have the capability to accept shares of individual stocks, ETFs, mutual funds, closed-end funds and other investment vehicles. The advantage to you as the donor is that you receive a charitable deduction equal to the fair market value of the security on the date of the completed transfer to the charity. Additionally you will not owe any tax on the gains in the investment unlike if you were to sell it.

This does not work with investments showing a loss since purchase and of course is not applicable for investments held in tax-deferred accounts such as an IRA. I suggest consulting with a financial or tax advisor here.

Match gains and losses in your portfolio

With the stock market having another solid year, though not nearly as good as 2013 was, year-end represents a good time to go through the taxable portion of your investment portfolio to review your gains and losses. This is a sub-set of the rebalancing process discussed below.

Note to the extent that recognized capital losses exceed your recognized gains you can deduct an extra $3,000. Additional losses can be carried over. This is another case where you will want to consult a tax or financial advisor as this can get a bit complex.

Rebalance your portfolio

With several stock market indexes at or near record highs again you could find yourself with a higher allocation to stocks across your portfolio than your financial plan calls for. This is exposing your portfolio to more risk than anticipated. While many of the pundits are calling for continued stock market gains through 2015, they just could be wrong.

When rebalancing take a look at all investment accounts including your 401(k), any IRAs, taxable accounts, etc. Look at all of your investments as a consolidated portfolio. While you are at it this is a good time to check on any changes to the lineup in your company retirement plan. Many companies use the fall open enrollment event to also roll out changes to the 401(k) plan.

Start a self-employed retirement plan

There are a number of retirement plan options for the self-employed. Some such as a Solo 401(k) and pension plan require that you have the plan established prior to the end of the year if you want to make a contribution for 2014. You work too hard not fund a retirement for yourself.

Take your required minimum distributions

If you are one of the many people who need to take a required minimum distribution from a retirement plan account prior to the end of the year you really need to get on this now. The penalties for failing to take the distribution are steep and you will still owe the applicable income taxes on the amount of the distribution.

Use caution when buying mutual funds in taxable accounts

This is always good advice around this time of year, but is especially important this year with many funds making large distributions. Many mutual funds declare distributions near year-end. You want to be careful to wait until after the date of record to buy into a fund in your taxable account in order to avoid receiving a taxable distribution based on a few days of fund ownership. The better path, if possible, is to wait to buy the fund after the distribution has been made. This is not an issue in a tax-deferred account such as an IRA.

Have a family financial meeting

With many families getting together for the holidays this is a great time to hold a family financial meeting. It is especially important for adult children and their parents to be on the same page regarding issues such as the location of the parent’s important documents like their wills and what would happen in the event of a long-term care situation. While life events will happen, preparation and communication among family members before such an event can make dealing with any situation a bit easier.

Get a financial plan in place

What better time of year to get your arms around your financial situation? If you have a financial plan in place review it and perhaps meet with your advisor to make any needed revisions. If you don’t have one then find a qualified fee-only financial advisor to help you. Just like any journey, achieving your financial goals requires a roadmap. Why start the journey without one?

If you are more of a do-it-yourselfer, check out an online service like Personal Capitalor purchase the latest version of Quicken.

These are just a few year-end financial planning tips. Everyone’s situation is different and this could dictate other year-end financial priorities for you.

The end of the year is a busy time with the holidays, parties, family get-togethers, and the like. Make sure that your finances are in shape for the end of the year and beyond.

Filed Under: Financial Planning Tagged With: ETF, Financial Advisor, Financial plan, Financial Planning, Investing, IRA, Mutual fund

7 Year-End 2013 Financial Planning Tips

December 3, 2013 by Roger Wohlner 10 Comments

Thanksgiving is behind us and we are in the home stretch of 2013. While your thoughts might be on shopping and getting ready for the holidays, there are a number of financial planning tasks that still need your attention. Here are 7 financial planning tips for the end of the year.

Use appreciated investments for charitable donations

If you would normally contribute to charity why not donate appreciated stocks, mutual funds, ETFs, closed-end funds, etc.? The value of doing this is that you receive credit for the market value of the donated securities and avoid paying the capital gains on the appreciation. A few things to keep in mind:

This only works with investments held in a taxable account.
This is not a good strategy for investments in which you have an unrealized loss. Here it is better to sell the investment, realize the loss and donate the cash.

Harvest losses from your portfolio

The thought here is to review investments held in taxable accounts and sell all or some of them with unrealized losses. These may be a bit harder to come by this year given the appreciation in the stock market. Bond funds and other fixed income investments might be your best bet here.

The benefit of this strategy is that realized losses can be offset against capital gains to mitigate the tax due. There are a number of nuances to be aware of here, including the Wash Sale Rules, so be sure you’ve done your research and/or consulted with your tax or financial advisor before proceeding.

Establish a Solo 401(k)

If you are self-employed and haven’t done so already consider opening a Solo 401(k) account. The Solo 401(k) can be an excellent retirement planning vehicle for the self-employed. If you want to contribute for 2013 the account must be opened by December 31. You then have until the date that you file your tax return, including extensions, to make your 2013 contributions.

Rebalance your portfolio

With the tremendous gains in the stock market so far this year, your portfolio might be overly allocated to equities if you haven’t rebalanced lately. The problem with letting your equity allocation just run with the market is that you may be taking more risk than you had intended or more than is appropriate for your situation.

Rebalance with a total portfolio view. Use tax-deferred accounts such as IRAs and 401(k)s to your best advantage. Donating appreciated investments to charity can help. You can also use new money to shore up under allocated portions of your portfolio to reduce the need to sell winners.

Review your 401(k) options

This is the time of the year when many companies update their 401(k) investment menus both by adding new investment options and replacing some funds with new choices. This often coincides with the open enrollment process for employee benefits and is a good time for you to review any changes and update your investment choices if appropriate.

Be careful when buying into mutual funds

Many mutual fund companies issue distributions from the funds for dividends and capital gains around the end of the year. These distributions are based upon owning the fund on the date the distribution is declared. If you are not careful you could be the recipient of a distribution even though you’ve only owned the fund for a short time. You would be fully liable for any taxes due on this distribution. This of course only pertains to mutual fund investments made in taxable accounts.

Required Minimum Distributions

If you are 70 ½ or older you are required to take a minimum distribution from your IRAs and other retirement accounts. The amount required is based upon your account balance as of the end of the prior year and is based on IRS tables. Account custodians are required to calculate your RMD and report this amount to the IRS.

Note beneficiaries of inherited IRAs may also be required to take an RMD if the deceased individual was taking RMDs at the time of his/her death.

If you have multiple accounts with multiple custodians you need to take a total distribution based upon all of these accounts, though you can pick and choose from which accounts you’d like to take the distribution. Make sure to take your distribution by the end of the year otherwise you will be faced with a stiff penalty of 50% of the amount you did not take on top of the income taxes normally due.

If you turned 70 ½ this year you can delay your first distribution to April 1 of next year, but that means that you will need to take two distributions next year with the corresponding tax liability. Also if you are still working and are not a 5% or greater owner of your company you do not need to take a distribution from your 401(k) with that employer. You do, however, need to take the distribution on all remaining retirement accounts.

For those who take required minimum distributions and who are otherwise charitably inclined, you have the option of diverting some or all of your distribution via a provision called the qualified charitable distribution (QCD). The advantage is that this portion of your RMD is not treated as a taxable income and may have a favorable impact on the amount of Social Security that is subject to income taxes for 2014 and other potential benefits. Note that you can’t double dip and also take this as a deductible charitable contribution. Consult with the custodian of your IRA or retirement plan for the logistics of executing this transaction.

With all of the strategies mentioned above I recommend that you consult with a qualified tax or financial advisor to ensure that the strategy is right for your unique situation and if so that you execute it properly.

Certainly year-end is about the holidays, family, friends, food, and football. It is also a great time to take execute some final year-end financial planning moves that can have a big payoff and in the case of RMDs save you from some hefty penalties.

Please contact me at 847-506-9827 for a complimentary 30-minute consultation to discuss all of your investing and financial planning questions. Check out our Financial Planning and Investment Advice for Individuals page to learn more about our services.

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Filed Under: Financial Planning Tagged With: 401(k), Asset allocation, Financial Planning, IRA Required Minimum Distributions, Mutual fund

Charitable Giving and Tax Reform

December 14, 2018 by Roger Wohlner 2 Comments

The Tax Cuts and Jobs Act passed in December of 2017 marks the biggest overhaul in the tax code in many years. One area that will be impacted under tax reform is charitable giving.

While charitable contributions remain eligible as an itemized deduction under tax reform, the ability to actually deduct your contributions may have been impacted by some changes in in the rules. Here are some thoughts for this holiday season and throughout the year.

Tax reform may impact your ability to itemize deductions including charitable contributions.

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SALT Cap

SALT stands for state and local taxes. Tax reform capped the amount of these taxes that can be used as an itemized deduction at $10,000 for 2018 going forward. The two biggest SALT components for most people are their state income taxes and their property taxes. This will especially impact those people living in states with high income taxes and locations with high property values/property taxes. Many commentators say this was politically motivated since taxpayers in “blue states” seem to be disproportionately impacted, I’ll leave that to you the reader to decide.

Higher standard deduction

The other major change that may impact your ability to itemize deductions is the increase in the standard deduction. Starting in 2018, the standard deduction increases to $24,000 for those who are married filing jointly and $12,000 for single filers. This means that if your itemized deductions are less than these thresholds, you will be better off taking the standard deduction versus itemizing.

Note that these and most provisions under tax reform expire after the 2025 tax year, so we will see what the future holds for these and other provisions beyond that.

Deductibility of charitable contributions under tax reform

The deductibility of charitable contributions was not eliminated under tax reform, in fact it was expanded for some high-income taxpayers. The issue for many taxpayers is whether or not they can still itemize deductions with the changes to the standard deduction limits and the SALT cap discussed above.

For those whose situation might not allow them to itemize, here are some ways to make your charitable giving more tax-efficient.

Bunch contributions

Let’s say that you and your spouse file a joint return. In this example let’s say your mortgage interest is $10,000 for the year and your SALT taxes are capped at the $10,000 level. With other deductible expenses your itemized deductions would come to $21,500, leaving you $3,500 short of the $24,000 standard deduction threshold.

One option would be to bunch expenses that would qualify as itemized deductions into 2018 (or any appropriate year) to get over the $24,000 hurdle.

In the case of charitable contributions, you might consider making additional contributions in the current tax year to help your reach the threshold where you can itemize. If you normally would make contributions of $1,500 per year and can afford to do so, you might try to make 2-3 years’ worth of contributions to the organizations of your choice in the current year to get your deductions above the threshold.

Give appreciated securities or assets

Using appreciated securities held in a taxable account to make charitable contributions has long been an excellent method to make charitable contributions. Stocks, mutual funds and ETFs that have appreciated in value are good gifts. Other types of appreciated assets can be used as well, such as art, collectibles and real estate. These types of assets will need to have an appraisal to determine their value as a gift, versus using the market value on the day of the gift for appreciated securities.

There are two potential benefits:

The value of the gift can be deducted as a charitable contribution for those who can itemize deductions.
There are no capital gains taxes that will be due on the contributed shares. If you were to sell the shares first and then contribute the cash, you would owe capital gains taxes on the amount of the realized gain on the sale.

This strategy can also be used as part of your overall portfolio rebalancing, it can be a tax-efficient way to rebalance your holdings.

Even for those who cannot itemize under the new rules, the benefit of not having to pay taxes on the capital gains can be a significant benefit.

If you have a security that has declined in value, you are generally better off selling it, realizing a loss on the sale and then contributing the cash.

If this is a route that is appropriate for you, be sure to contact the organization to ensure that they can accept gifts of appreciated securities or other types of assets.

Using appreciated securities held in a taxable account to make charitable contributions has long been an excellent method to make charitable contributions.

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Donor-advised funds

A donor-advised fund is a fund that allows you to have your contributions to the fund professionally managed, offering the opportunity to make contributions to qualified charitable organizations over time. DAFs have been around for many years and are offered by such big-name financial services organizations like Vanguard, Schwab and Fidelity among others.

After establishing your account, contributions to the DAF can be made via check, securities or other assets. The details may vary a bit from fund to fund.

The fund invests your contributions professionally, typically through a list of individual funds or several managed portfolios they might offer. The money grows, and contributions can be made over time to the organization(s) of your choosing, as long as they are qualified charities. Most DAFs have minimum initial and future contribution levels, as well as minimum donation levels.

DAFs fit well into the new tax environment in that they can accept appreciated securities and can be a great vehicle to bunch your contributions in order to be able to itemize in certain years. They also allow you to space out your charitable donations if your desire is to give a certain amount each year.

RMD – Qualified Charitable Distribution (QCD)

For those who are age 70 ½ or older, you can direct some or all of your required minimum distribution (RMD) to a qualified charitable organization each year in what is called a qualified charitable distribution (QCD). The limit is $100,000 annually.

The QCD has been around for a number of years. The amount directed to the charity is not taxed. This is beneficial for many reasons, including keeping your income in a range that offers the lowest future Medicare costs.

The amount of the QCD does not qualify as a deductible charitable contribution. If you have charitable intentions, this can be a tax-efficient way to make charitable.

The Bottom Line

Contributing to charity is a great thing to do for those of us who are able to do it. As a Jesuit priest told me back in my graduate school days at Marquette University, you might as well take any tax breaks possible when making donations. The ideas above can help make your contributions a bit more tax-efficient.

As with any tax or financial planning issue, be sure to consult with a qualified tax or financial professional to determine if these ideas make sense for your situation.

Please contact me with any thoughts or suggestions about anything you’ve read here at The Chicago Financial Planner. Don’t miss any future posts, please subscribe via email. Check out our resources page for links to some other great sites and some outstanding products that you might find useful.

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Filed Under: Financial Planning Tagged With: charitable contributions, IRA Required Minimum Distributions, tax reform

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Leaving your money in the old plan

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Maximize your retirement savings

Review Social Security

Get your arms around all retirement accounts

Figure in our other financial resources

Take the money and run

Develop a retirement budget

Do a Retirement Projection

Think about how you will take your money

Poke holes in your plan

Hire professional help if you need it

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Consider appreciated investments for charitable giving

Match gains and losses in your portfolio

Rebalance your portfolio

Start a self-employed retirement plan

Take your required minimum distributions

Use caution when buying mutual funds in taxable accounts

Have a family financial meeting

Get a financial plan in place

Use appreciated investments for charitable donations

Harvest losses from your portfolio

Establish a Solo 401(k)

Rebalance your portfolio

Review your 401(k) options

Be careful when buying into mutual funds

Required Minimum Distributions

SALT Cap

Higher standard deduction

Deductibility of charitable contributions under tax reform

Bunch contributions

Give appreciated securities or assets

Donor-advised funds

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