Total Counsel Law Group

What’s the Big Deal about Turning 59½?

“If you’re nearing the big 6-0, don’t fret too much about getting old. After all, 60 is the new 40, right? There are many 50-and 60-year-olds who are in prime health and feel like they are just hitting their stride. Not to mention the often-forgotten benefits of getting older, like discounts at McDonald’s, Denny’s, Chick-fil-A and KFC.”

Minor stuff aside, there are some real financial benefits to reaching age 59½, says Kiplinger in the article “What Should You Do When You Turn 59½?” Here are some important tasks to accomplish when you turn 59½, that will help you explore new opportunities and build a strong foundation for your future retirement.

Review Your 401(k). At age 59½, you reach the magic age when you can start taking money out of your retirement accounts without penalty. That’s not to say it’s time to drain your accounts, but it does give you more options.

Create a Safety Net. Hopefully you know about the benefits of having an emergency fund. Having a “rainy day” fund, can give you peace of mind.

Until now, your only real options to beef up such a fund were a savings or money market account that couldn’t even keep up with inflation. Now that you’re 59½ and the withdrawal penalty is no longer applicable, you can actually use your 401(k) as a readily accessible, tax-deferred safety net. In a retirement account, you can also invest some of the funds for growth. You should still keep a bit of cash for emergencies. In addition, withdrawals from retirement accounts will be taxable, because you’ve never paid taxes on that money.

Take Advantage of Catch-Up Contributions. The IRS lets people age 50 and older contribute extra to their retirement accounts, including both IRAs and employer-sponsored accounts. This not only builds your retirement savings, it can decrease your taxable income. A lower income can keep you in a lower tax bracket and make you eligible for more tax deductions. That saves money on taxes.

Look into an In-Service Rollover. The major complaint with 401(k) plans, is the lack of investment options available within a given plan. The average 401(k) plan has fewer than a dozen options, according to FINRA. Compare that with the variety of options available on the open market. Once you hit 59½, you may be eligible for an in-service rollover, which lets you to move 401(k) funds into an IRA without penalty, while still working at the same job. It’s a unique opportunity to access better investments that is not available to most workers. There are more investment options within an IRA and greater flexibility and control.

Monitor Your Spending. One of the tough things about retirement planning when you’re younger, is that you have almost no idea what your retirement needs will be. However, at 59½, it’s near enough that you should have a better sense of your needs during retirement.

Start tracking your spending to create a retirement budget. This will help you decide when to retire, because you’ll be able to see the trade-offs between working longer and the lifestyle you’ll be able to afford in retirement.

Remember Health Care. Start to consider your health care. A common mistake people make when retiring early, is to neglect health insurance. While you can access your money penalty-free now, you don’t have access to Medicare until age 65. If you’re playing with the notion of retiring before 65, start looking into your health care options now and make certain that you have coverage until you reach Medicare eligibility.

Reference: Kiplinger (June 28, 2019) “What Should You Do When You Turn 59½?”

When Should I NOT Open an IRA?

“In the world of financial planning, the Roth IRA sometimes looks like the cool younger brother of the more vanilla traditional IRA. Indeed, the Roth version, first introduced in 1998, offers a number of features that look pretty attractive: a lack of required minimum distributions (RMDs), the flexibility to withdraw money prior to retirement and the ability to make contributions past the age of 70½.”

Often choosing between a Roth or a traditional IRA, comes down to how much you’re making now and how much you expect to bring in once you stop working.

Investopedia’s recent article, “When Not to Open a Roth IRA,” explains that both types offer distinct tax advantages for those saving money for retirement. However, they work somewhat differently.

With a traditional IRA, you invest pre-tax dollars and pay income taxes, when you withdraw the money in retirement. You pay tax on both the original investments and what they earned. However, a Roth is the opposite: you invest money that’s already been taxed at the ordinary rate and withdraw it and its earnings tax-free at a later date.

In deciding one over the other, the key question is whether your income tax rate will be higher or lower when you start withdrawing funds. The other difference between the accounts is that RMDs are mandated by traditional IRAs. These are cash withdrawals from the account (on which you pay taxes) that must begin the year following the year in which its owner turns 70½. Roths have no RMDs.

For younger workers who have yet to realize their earning potential, Roth accounts have a definite edge. This is because when you first enter the workforce, it’s quite possible that your effective tax rate will be in the low single digits. Your salary will probably go up over the years. That means you’ll have greater income, and quite possibly be in a higher tax bracket in retirement. There is, therefore, an incentive to front-load your tax burden.

However, the opposite might be true, if you’re in your peak earning years. If you’re in one of the higher tax brackets now, it may have nowhere to go but down in retirement. If that’s the case, you’re probably better off postponing the taxes, by contributing to a traditional retirement account.

However, for the most affluent investors, the decision may be a moot point, because of IRS income restrictions for Roth accounts.

There are many unique benefits associated with a Roth IRA, but there’s no one-size-fits-all approach to retirement planning.

Reference: Investopedia (October 5, 2018) “When Not to Open a Roth IRA”

What Are The IRA Contribution Rules?

“If you work, you may be able to contribute to a Roth IRA. This type of retirement savings account allows you to take tax-free withdrawals of your contributions at any time and tax-free withdrawals of earnings on contributions, after a five-year holding period (assuming you are at least 59½, disabled or using them for first-time home-buying expenses).”

Investopedia’s article, “Roth IRA Contribution Rules: The Basics,” explains that the one requirement for contributing to a Roth IRA is having earned income. That’s income from a job or net earnings from self-employment.

A couple with a large difference in incomes might want to add the higher-earning spouse's name to a Roth account to increase the contribution limits.  However, the IRS says you can’t maintain joint Roth IRA accounts. There is a way to contribute larger amounts, if your spouse establishes his or her own IRA. A spouse who works can also contribute to a Roth IRA for a nonworking spouse (with sufficient income). However, remember that your contribution may be restricted or barred, if your income is too high. Roth IRA contributions are phased out, when your Modified Adjusted Gross Income (MAGI) is more than a set limit for your tax filing status.

There is no minimum or maximum age for making Roth IRA contributions. The fact that you participate in a qualified retirement plan doesn’t affect your eligibility to make Roth IRA contributions. The maximum contribution for 2018 is $5,500 ($6,500 if you’re 50+ by the end of the year). An annual contribution can’t exceed earned income.

Conversions to a Roth IRA from a taxable retirement account, like a 401(k) plan or a traditional IRA, don’t have any effect on the contribution limit. However, making a conversion adds to MAGI and may mean a phaseout of your Roth IRA contribution amount. Rollovers from one Roth IRA to another also aren’t taken into account in making annual contributions. Roth IRA contributions can be made up to the due date of the return for the year to which contributions relate. Therefore, contributions to a Roth IRA for 2017 could have been made through April 17, 2018, as that was the due date for the 2017 income tax return. Getting an extension of time to file a tax return, doesn’t give you more time to make an annual contribution. You can also make a Roth IRA contribution by having the IRS apply some or all of a tax refund.

Contributions to Roth IRAs aren’t tax deductible, because they’re done with your after-tax earnings. A Roth IRA is tax-free income for the future, but you may be eligible for a tax credit, of 10-50% on the amount contributed to a Roth IRA. Low- and moderate-income taxpayers may qualify for an additional tax break—the Saver's Credit, which is a retirement savings credit up to $1,000, based on your filing status, MAGI, and Roth IRA contribution.

You don’t have to report your Roth IRA contribution on your federal income tax return. However, you should keep track of it. This will help you show you’ve met the five-year holding period for taking tax-free distributions of earnings from the account.

When you make a Roth IRA contribution, the custodian or trustee will send you Form 5498. Box 10 of this form shows your Roth IRA contribution. Retain this form with your tax returns records for each year that you make a Roth IRA contribution.

OK, it’s not tax deductible, but a Roth IRA gives you the chance to create a tax-free savings account you can use in retirement or leave as an inheritance for your family.

Reference: Investopedia “Roth IRA Contribution Rules: The Basics”

The Keys to Financial Planning for Single Parents

“One of the biggest challenges for single parents, is learning to balance competing financial demands.”

Whether they are single by choice, divorce or the death of a spouse, single parents typically don’t have the security of a second income or a safety net. They need a financial plan to prepare for unanticipated events. A plan will also help with care for the children and retirement.

CNBC’s recent article, “Five financial essentials for single parents,” says that when single parents try to satisfy their kids, it can lead to a severe unintended consequence: placing their children ahead of their own retirement needs.

In addition to naming a guardian in a will, there are five other critical financial moves.

1. Set up an emergency cushion. A solid emergency fund is the initial step. You should have three to nine months' expenses in that fund. Don’t forget to add whatever costs the kids have each month, like sports and activity fees, school lunches, clothing and school supplies.
2. Check on the right amount of insurance. Life insurance can help your family cope financially without your income. Your income could be lost through illness, so consider disability insurance. If you own a home, purchase flood insurance.
3. Create definitive savings goals. You most likely have things that you'd like to do for your family, such as purchase a home, pay for college or plan a special vacation. Each of these will be on a different timeline. Divide this into near-, medium-, and long-term savings goals. Your near-term goals will happen within five years. The way in which you invest these three silos of money is based upon your unique time horizon. If you have decades before you retire or need to pay tuition for a newborn, you can take on more risk. Examine your allocation among these accounts and review them once a year, to see if the amounts you're putting in each—and the investment strategies—still match your goals.
4. Have a set savings percentage. There's no set number that works for everyone. There are recommendations to save at least 6% or 9% of your income, but it’s not always possible. If you can only save $30 a month, do it and be glad! Just creating a positive habit of saving is important. Even if you save as little $10 a month, do it with the notion that you'll increase the amount, when your finances permit. A good rule of thumb is to put away 10% of your gross, not take-home, pay and as you get raises, increase your savings rate. Developing that disciplined habit of saving can help you accomplish many of your financial goals.
5. Make your retirement plan. With your savings and Social Security, achieving a 50% replacement of income may be enough for people with modest salaries. However, a person who earns $100,000 will be more likely to want 85 to 90% of income. Therefore, they’ll have to save more. In sum, the more you have, the more you’ll need to save to be able to spend the same amount of money and live the same way in retirement.

If your employer offers a workplace retirement plan, contribute in order to get the match. After all, it's free money! If you don’t have a workplace plan, set up an individual retirement account (IRA) and make the deposits automatic.

Reference: CNBC (August 20, 2018) “Five financial essentials for single parents”

A Tax-Free Transfer from an IRA to Charity Can Make a Significant Difference in Retirement

“Besides benefiting the charity, you may save a bundle on income taxes, as well as stay below the income cutoff for some other taxes and charges.”

At 70 ½, you need to begin taking required minimum distributions from your retirement accounts.

You can make a tax-free transfer from an IRA to charity and have that count as the RMD. However, you may question the advantage of doing that versus withdrawing the money and making a charitable donation on your own. If you itemize deductions, doesn’t it have the same effect?

According to a recent Kiplinger article, “The Advantages of a Tax-Free Transfer From an IRA to Charity,” if you itemize, the tax deduction will appear to be identical. That is, at first glance.

However, the transfer is deemed to be a qualified charitable distribution, which keeps your required minimum distribution outside of your adjusted gross income. This can help you remain under the income cut-off for some other taxes and charges. In addition, for those who don't itemize their deductions, making the tax-free transfer can benefit from their charitable gift.

If you are required to take large RMDs from your retirement savings, you could be lifted into a higher premium level for Medicare. However, making a tax-free transfer of that RMD to charity keeps that sum from the Medicare premiums calculation. If your AGI plus tax-exempt interest income is more than $85,000 for singles or $170,000 if married filing jointly, you'll have to pay higher Medicare Part B premiums. That could be a substantial difference: the monthly premiums are about $109 per month for most people who have their premiums deducted from their Social Security payments or $134 for new Medicare enrollees. Those subject to the high-income surcharge must pay from $187 to $428 per month for Medicare Part B in 2017, depending on their income—plus an extra $13 to $76 added to their premiums for their Part D prescription-drug coverage.

A lower AGI can also help you lower taxes on your Social Security benefits. You need to look at your provisional income, which is your adjusted gross income, not counting Social Security benefits, plus nontaxable interest and half of your Social Security benefits. If your "provisional income" is less than $25,000 and you file taxes as single or head of household—or less than $32,000 if you file a joint return—you won't owe taxes on your Social Security.

If you’re single and your provisional income is between $25,000 and $34,000—or between $32,000 and $44,000 if married filing jointly—up to 50% of your benefits may be taxable. If it’s more than $34,000 if single or more than $44,000 if married filing jointly, 85% of your Social Security benefits could be taxable. Keeping your RMD out of your AGI can help reduce your provisional income.

Remember: if you're over 70 ½, you can transfer up to $100,000 tax-free from your IRA to a charity annually.  However, the funds must be transferred directly from your IRA to the charity to stay out of your AGI.

For more information, please visit our website at www.totalcounselor.com

Reference: Kiplinger (May 12, 2017) “The Advantages of a Tax-Free Transfer From an IRA to Charity”

Making That First RMD

“If you turned 70½ last year, you had the option to delay your first required minimum distribution until April 1 of this year. Fair warning: That's a Saturday, so don't wait until the last minute.”

If you turned 70½ last year but did not take the required minimum distribution (RMD) from your IRA, then you had until April 1 of this year. So, did you make it in time?

Kiplinger’s recent article, “Meeting Your First RMD Deadline,” explains that although the IRS is extending the April 15 deadline for filing your tax return to the 18^th this year because of the weekend and a Washington, D.C., holiday, there was no break or delay coming for taking your required minimum distribution (RMD).

If you turned 70½ in 2016, you were required to take your first RMD by April 1, 2017 (if you haven't already withdrawn the money). If you didn’t, you'll pay a penalty that’s equal to 50% of the amount of money you should have withdrawn.

Note that if you delayed taking your first RMD, you’ll also have to take the one for age 71 by December 31 of this year. That withdrawal can increase your adjusted gross income a bit. It may also bump you into a higher tax bracket.

In addition, it could make you subject to the Medicare high-income surcharge, if your adjusted gross income (AGI)—plus tax-exempt interest income—totals more than $85,000 if you’re single or $170,000 if you are married and filing jointly.

A good way to shelter your required withdrawal from your AGI, is to make a tax-free transfer from your IRA to a charity. If you're 70½ or older, you can transfer up to $100,000 per year to a charity from your IRA. This will count as your RMD, but it isn't included in your adjusted gross income.

For more information, please visit our website at www.totalcounselor.com

Reference: Kiplinger (March 15, 2017) “Meeting Your First RMD Deadline”

Avoid This Common Estate Planning Mistake

“Most people don’t want to be a burden on their family or children. One of the best things you can do to accomplish this goal, is to get your estate planning in order.”

What if your spouse is ill and you meet with an estate planning attorney to organize your family affairs? The attorney drafts a trust document and a will, and you and your spouse sign it. That’s that. You think everything is fine. However, what if your spouse suddenly dies, and you discover that the accounts aren’t set up to transfer the way you both wanted. Oh-oh. Could this happen to you?

Trust Advisor’s recent article, “These Hidden Estate Planning Mistakes Can Have Horrible Consequences,” reports that it happens all the time.

For instance, a couple might be in their second marriage with no children in common. However, the wife has two children from her first marriage. She and her current husband had been together for 10 years, when she’s diagnosed with cancer.

When they see an attorney, they agreed that her assets would be divided one-third each to the husband and her two children. But most of her assets were in her company 401(k), and the beneficiary on the 401(k) was the husband. No one changed the 401(k) beneficiary designation to reflect the wife’s wishes. When she died, he tried to get the 401(k) to send one-third to each of her children, but it didn’t work. Her employer was legally required to distribute the account, according to the most recent beneficiary designation that they had.

In our example, the husband was a decent sort: he rolled the 401(k) into his own IRA, withdrew the two-thirds for the kids, paid the tax, and gave each of his second wife’s children their share. If they had properly updated the beneficiary form to add the children as direct beneficiaries of the 401(k), the tax cost would have been much less significant. It’s not an uncommon estate planning mistake.

If you have a will and trust, it’s important to note that these account titles and beneficiary designations supersede everything and anything that’s mentioned in your will and trust. If this isn’t set up right, it can mean some time-consuming and expensive maneuvering for your family.

If your accounts list only the husband or wife as the owner, the account titles need to be changed to reflect their trust as the owner. If the wife passes away before this is done, the accounts must go through probate.

Be sure there isn’t a dormant administrative nightmare waiting for your loved ones. Your retirement accounts, life insurance policies and annuities let you designate a beneficiary. Review these periodically and update them if necessary.

For more information, please visit our website at www.totalcounselor.com

Reference: Trust Advisor (March 9, 2017) “These Hidden Estate Planning Mistakes Can Have Horrible Consequences”

Do I Really Make Too Much to Set Up a Roth IRA?

“If I earn too much to contribute to a Roth IRA, can I still contribute to a traditional IRA and then immediately convert it to a Roth? Would I have to pay taxes on the conversion?”

Kiplinger’s recent article, “How High Earners Can Set Up a Roth IRA,” says that anyone can make nondeductible contributions to a traditional IRA, subject to certain limits. For example, you can’t make Roth IRA contributions if your modified AGI (adjusted gross income) last year was over $132,000 if single or $194,000 if married filing jointly.

Experts say there’s a backdoor approach to a Roth: contribute to a traditional IRA and subsequently convert it into a Roth.

There’s no income limit for converting money from a traditional IRA to a Roth IRA. If you don’t have a retirement plan at work, you may be able to deduct the IRA contributions. You have until April 18, 2017 to contribute to an IRA for 2016. After that date, you can convert the money to a Roth almost right away.

Experts who use this strategy, suggest that you wait a day after making the IRA contribution to convert the money into a Roth. This helps clearly show the IRS that the original contribution was to a traditional IRA not a Roth, while providing the least amount of time for the IRA to generate earnings before the conversion.

There will be taxes due on the conversion, except for any part that is from nondeductible IRA contributions. If this nondeductible IRA is your only traditional IRA, you’ll be liable for taxes only on any earnings in the account after you made the contribution and before you made the conversion to the Roth. The whole conversion is taxable, if all the funds in your traditional IRA were from tax-deductible contributions.

It gets a bit more complicated if you have other money in IRAs. Your taxes are based on the ratio of your nondeductible contributions to the total balance of all your traditional IRAs (not money already in Roth IRAs), when you make the conversion. This would include money in SEP and SIMPLE IRAs.

For more information, please visit our website at www.totalcounselor.com

Reference: Kiplinger (February 24, 2017) “How High Earners Can Set Up a Roth IRA”

Things to Think About Before Making a Roth IRA Conversion

"The Roth IRA, with its unique tax advantages, can be a powerful financial-planning tool. However, rolling funds from a traditional IRA into a Roth is not the right move for everyone."

The Motley Fool's article, "5 Things to Consider Before Making a Roth IRA Conversion," says that although Roth IRA conversions are popular, there are a few key things to consider before moving forward. Here are the five considerations identified by the article:

1. Your tax bracket. These days it's not unusual for retirees to be in a higher tax bracket during retirement. However, many of us have the option of investing in a Roth IRA, which doesn't offer an up-front tax break—but lets you withdraw funds in retirement tax-free. If you think you are going to be in a higher tax bracket when you retire, you might consider converting some or all of your retirement savings to a Roth before you retire. Converting some or all of your traditional IRA money to a Roth IRA will also give you some tax diversification in retirement to hedge against future changes in tax rates and related rules.
2. Estate planning. One of the great things about a Roth IRA is that it isn't subject to required minimum distributions (RMDs) at age 70½, unlike a traditional IRA, where you must withdraw an IRS-mandated amount annually at that age. Plus, it's subject to income taxes. Roth IRAs can continue to grow tax-free for as long as you live, and if your beneficiary is your spouse, he or she can roll over the account and make the Roth IRA his or her own with the same rules (non-spousal beneficiaries are subject to an RMD, but that distribution isn't taxed). In addition, non-spousal beneficiaries can take the RMDs over their entire life expectancy. This is a terrific benefit for younger beneficiaries like children or grandchildren.
3. Be ready for the tax hit. The big minus for a Roth IRA conversion is that any funds you roll over will be subject to income tax in the year of the conversion. That means older folks should consider whether they can cover the tax bill and generate enough investment growth to offset the impact. Plus, there may be other considerations—like estate planning—that become more important than "payback" concerns.
4. College financial aid. If you have college-age children who will be applying for financial aid, you may want to avoid Roth conversions when their aid is calculated. The extra taxable income could affect their eligibility or the amount of aid.
5. Stock market declines. A drop in the stock market may give you a great opportunity for a Roth IRA conversion and get you more bang for your buck. You will be converting a lower amount and paying less in taxes. If you're thinking about rolling over your traditional IRA, consider taking advantage of the stock market correction by converting a larger portion of your old account, or think of it as another way of "buying low and selling high."

Converting your traditional IRA to a Roth IRA is a powerful tool that can provide financial planning options for many. But before you make a Roth conversion, consider the pros and the cons.

For more information on estate planning, please visit our website here

Reference: Motley Fool (February 27, 2016) "5 Things to Consider Before Making a Roth IRA Conversion"

Following the Rules in IRA Contributions

“Besides the cash contribution limitation, there are many other rules to follow when making contributions into an IRA.”

If you have money in a stock account or in retirement accounts, you may want to use the stock account to add money to your IRA. At issue is whether you’d need to sell the stocks first and then transfer the money to an existing IRA or whether a new one is needed.

Unfortunately, it’s not as easy as transferring stocks from one account to an IRA. The rules stipulate that IRA contributions must be made in cash—that means you can deposit a check, electronically transfer cash between accounts at different financial institutions or authorize an internal cash transfer between accounts at the same bank.

Selling some stock in a non-retirement account is an option to free up enough cash to make an IRA contribution, but NJ 101.5’s recent article, “Moving your money to an IRA,” explains that first you should look into whether a contribution to a traditional IRA or a Roth IRA is a better option.

Each type of IRA must be in a separate account. Whether you need to open a new IRA depends on your desired IRA contribution type and what kind of IRA you already own. Also, it’s important to note that contributions into a SEP-IRA or Simple IRA have a different set of rules.

With a traditional or Roth IRA, you can make an annual contribution up to $5,500 or 100% of earned income—whichever is less. In addition, if you’re at least age 50 and have more earned income, you can also contribute an extra $1,000, which is called the “catch-up” contribution.

You can make an IRA contribution at any time during the year, but you have up until April 15^th of the following year to make your contribution. There aren’t any extensions, even if the IRS grants you an extension to file your income taxes.

With a traditional IRA, the contributions are deductible, but only if you or your spouse aren’t a participant in a qualified company retirement plan—like a 401(k) or profit-sharing. If you are a participant, your ability to deduct a traditional IRA contribution is phased out at $61,000 adjusted gross income (AGI) for singles and $98,000 for a married couple. Your spouse’s ability to deduct a contribution starts to phase out at $183,000 if only you are a participant in the qualified plan.

You can’t contribute to a traditional IRA if you are over 70½, despite having had earned income.

IRA distributions are usually taxable. They are also subject to a 10% early withdrawal penalty prior to age 59½, and minimum withdrawals are required after age 70½. For a Roth IRA, contributions are never deductible, but distributions are typically tax-free.

Your age and participation in a qualified plan will impact the ability to contribute to a Roth IRA, but your ability to contribute is phased out at $117,000 AGI for single taxpayers and $184,000 for married taxpayers. There are no required minimum distributions; however, the earnings portion of distributions may be taxable and/or subject to a 10% penalty if the Roth wasn’t opened for five years—depending on your age. There are different rules for those who are under age 59½, for those between the ages of 59½ and 70½ and for those over 70½.

For more information on Roth IRA’s and IRA Distributions please visit our website here

Reference: NJ 101.5 (September 7, 2016) “Moving your money to an IRA”