Monthly Archives

September 2018

Start Your Year End Planning Now

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It may seem as if the end of the year is very far away and that there is no need to start making end of the year financial plans as of yet. However, the reality is that the end of the year, and the activities which surround it are busy.  At times, with all the festivities going on, it becomes close to impossible to do anything sensible where financial planning is concerned. You should consider starting your end of year plans now because early plan may spare you the heavy fines. Here are a few things that you should consider doing right now.

If It’s Time, Get Your RMD

You probably know that you are supposed to start making withdrawals from your IRA or other retirement plans when you reach the age of 70 and a half. If you don’t take your RMD on time, you may be forced to pay a 50 percent excise tax on the amount which you will have failed to distribute. This is another reason why working with a Financial Advisor can help you avoid penalty’s and anxiety.

Making A Charitable Contribution

Did you know that if you make a charitable contribution using a Qualified Charitable Distribution, you will get a tax exemption of the amount and the amount donated could also qualify as RMD?   If you have not made any donation this year, perhaps now is the right time to make a meaningful contribution from your IRA.  Again, seek professional guidance on this strategy.

Other Tax Mitigating Strategies

This is the perfect time to look into all your accounts and see whether there are tax gains which you can still capitalize on this year. If you do not understand how having investments such as mutual funds could affect your taxes and distribution, talk to a financial expert and have everything straightened out before the year ends and you are left with massive losses in your hands.

Avoid Tax Deferral

Don’t Delay!   When the year is coming to an end, some postpone all their tax related items until a later date. Tax deferral may seem like a quick fix to grow your money, but it is important to note that it puts off your taxes as opposed to getting a permanent resolution to the problem. If you are employed, it may be wise to fund your employer sponsored plan as much as possible to get the full match of the company.  After all, free money is indeed the best kind that there is, right?

Yes, all of this takes knowledge and effort but can pay off with the proper plan.  We are here to help you plan for everything that comes with a successful retirement.  Start early, plan ahead and you will have the best shot at a confident retirement.

The Executive Order on Retirement Savings

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President Donald Trump signed an executive order Friday, August 31, that proposes asking for reviews on changing certain rules for tax-deferred retirement savings such as 401(k)s and individual retirement accounts, or IRAs. Trump signed the order during a scheduled visit to Charlotte, N.C., and asked the Treasury Department to review the rules for mandatory withdrawals from 401(k)s and IRAs. These mandatory withdrawals are better known as RMDs, and they are required in the year the owner of these tax-deferred accounts turns 70 1/2. According to the Wall Street Journal, the White House is promoting these actions to better prepare the workforce for retirement.

The executive order has tasked the Labor Department to consider permitting small businesses to join together in offering combined 401(k) plans, as detailed by POLITICO. Currently, the Labor Department does not allow unrelated small businesses to offer joint open multiple employer 401(k) plans. The executive order is requesting the Labor Department to search for ways to decrease administrative and paperwork requirements that might be prohibitive to small businesses offering savings plans.

These open multiple employer plans would supposedly help more small businesses to offer their employees savings plans because of the decreased expenses incurred if the plans are jointly administered by several businesses. As reported by POLITICO, Preston Rutledge, assistant secretary of the Employee Benefits Security Administration at the Labor Department, said “Basically, we will be trying to find policy ideas that will help make joining a 401s(k) plan a more attractive proposition for small employers.”

Currently, holders of tax-deferred retirement accounts are required to begin minimum withdrawals from the accounts beginning the year they turn 70 1/2. These RMDs are predetermined amounts in a table set by the IRS according to age and must be taken on an annual basis. The purpose of the withdrawals is for the government to start collecting the taxes owed on these accounts, which have enjoyed tax-free status until then.

According to CNBC, the reviews would be of the life expectancy tables from the IRS for the purpose of updating the tables, which may allow retirees to withdraw lower RMDs from their tax-deferred retirement accounts. These tables were last updated in 2002, and the average life expectancy has risen since then from under 77 to 78 1/2, as derived from data compiled from the Federal Reserve Bank of St. Louis and noted by CNBC.

This would be helpful to retirees because the tax hit of these withdrawals can be spread out more over a longer period of time. Taking large withdrawals can significantly increase income levels, which translates to a higher tax bracket for many. These smaller distributions can also help those who have inherited tax-deferred accounts and are taking distributions.

If the rules for open multiple employer plans are relaxed, small business owners could join with other, dissimilar small business and implement savings plans for their employees. That could help these business owners attract more skilled employees because of the retirement savings plans added to their employee benefit packages.

Charitable Giving And Retirement

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The average individual can spend less during their retirement due to a budget. One exception can be giving to charitable causes. A study by the WPI or the Women’s Philanthropy Institute looked at the way households in America spent money as they retired. The study revealed both single women and married couples maintained the same level of giving to charities both prior to and after they retired. The charitable giving of single men decreased once they retired.

The report from the WPI also showed both married and single women have less confidence regarding their financial health upon retirement than men. Their focus is not on outliving their savings. Considering women generally live longer than men, this fear is justified. There are numerous ways for both women and men, married and single, to donate to charitable causes without being concerned about running out of money. Using savings meant for retirement to make donations is most likely to cause the individual to outlive their savings unless they use proper care.

A way to donate to causes in retirement is to plan for them just as you did your retirement savings portfolio.  A portfolio likely plans for retirement income to last the life of the individual. One of the most important aspects of the retirement portfolio are the monthly retirement paychecks. These are guaranteed and will last for a lifetime. If the stock market crashes, this income will not decrease. These paychecks can then be supplemented with either yearly or monthly retirement bonuses. These may have fluctuations depending on the investment performance, but they can last for life.

When the portfolio is properly in place, charitable giving can be funded with these bonuses and paychecks. It is important to allow for charitable giving as part of the budget in addition to the other living expenses. This will enable the individual to give to charities while ensuring the person will not outlive their savings. There is another excellent method for planning to increase effectiveness for charitable giving. Many individuals have concerns the recent changes made to the tax laws may decrease their income and impact their charitable giving.

The concern is there will be a significant decrease in the taxpayers itemizing their deductions. This makes it harder to use taxable income to make donations. Any individual age 70 and 1/2 or above has another option. A traditional IRA can be used for a qualified charitable distribution. This distribution will not be included in the taxable income. The distribution will also apply towards the minimum required distribution.

There is an annual limit of $100,000 for qualified charitable distributions. This cannot be funded from both 401 (k) plans and IRA’s. If the 401 (k) plan contains a substantial savings, these funds can be used for charitable giving by rolling over the savings into an IRA. The IRA platform must enable the individual to be able to write checks.

The report from the WPI also revealed married couples and single women have a higher likelihood of volunteering once they retire than single men. There is a lot of research showing volunteers enjoy financial security and health benefits while providing their communities with substantial contributions. The documentation for this research is located in the Hidden in Plain Sight report prepared by the Center on Longevity located at Stanford. Anyone not currently volunteering may want to give some thought to pursing this activity once they have retired.

Planning for both volunteering and charitable giving may be important when determining retirement planning. This will not only enable the individual to give something back to their community, it often increases the enjoyment of life.  Let’s review your plan today, contact us to set up a time to talk.

Retire Early, Tap Your 401k Early… Penalty?

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The way we work and save for retirement has changed and the old rules no longer apply to every individual’s situation. There are many professionals with the resources to retire early, but continue working until retirement age just to avoid paying penalties to the IRS. However, there are ways to retire early that you might want to consider.

You Can Pay the Penalty

The most obvious solution is to bite the bullet and pay the 10% penalty for early withdrawal. Most people are motivated to avoid paying the early withdrawal penalty and will wait until the legal retirement age of 59 ½, before accessing funds in their retirement accounts. This can be an attractive option, simply because the tax-deferred investments in your 401k may have outperformed other taxable investments. If this is the case, your tax benefits may actually pay for the penalty by the time you’re ready to retire. Of course, this all depends on how well your tax-deferred investments have performed.

The Substantially Equal Periodic Payments Option

The IRS allows early retirees to access their retirement funds without paying the penalty through their Substantially Equal Periodic Payments (SEPP) program. An early retiree will have to consent to making substantial annual withdrawals each year until they reach traditional retirement age, as outlined by a calculation chart published by the IRS. However, failing to withdraw the correct amount each year can cause the IRS to charge you with the 10% penalty for each withdrawal you have already made. For this reason, it’s best to work with a tax professional to ensure you meet all of the requirements set out through the SEPP program.

Additionally, the program requires that you fulfill a minimum of five withdrawals, before your obligation is complete. If you retire at 40, you must adhere to the withdrawal requirements until you turn 59 ½ years old. However, if you retire at 57, you must continue the SEPP withdrawals until you reach 62 years of age. As long as you can adhere to the timetable, this may be a good option for accessing your retirement funds early and without paying the penalty.

Convert to a Roth IRA

Another option that will help you avoid the 10% penalty is to convert your 401k to a Roth IRA. Once you open the account, you will have to wait five years, before you can begin withdrawing your contributions. For that reason, it will be important to anticipate your early retirement and plan ahead. However, once you have met that requirement, you can begin withdrawing without facing a penalty.

An additional restriction is that the IRS requires that withdrawals be made in a particular order. You must withdraw direct contributions first, before withdrawing funds that were converted into the account. Lastly, you can withdraw earnings on those contributions. Depending on your situation, this may be a worthwhile alternative.

While these options do exist, waiting for retirement age may still be worthwhile. Where a 401k account is concerned, remaining on the job will keep those employer contributions coming. That “free money” will pad your retirement account, while your savings continue to earn on investments. Additionally, you’ll continue to benefit from tax breaks for a few more years. Ultimately, it will be your decision, which you can only base on your specific circumstances. If you do choose to retire early, you should consult a Financial Advisor and/or tax professional, before you act.