Required Minimum Distribution Mistakes to Avoid

Required Minimum Distribution Mistakes to Avoid

Required Minimum Distribution Mistakes to Avoid

Even a small miscalculation can result in big taxes and penalties.

Traditional retirement accounts are tax-deferred, not tax-free. As baby boomers turn 70, they must soon begin mandated withdrawals and pay the taxes on the money they tucked into retirement accounts over several decades.

A required minimum distribution is the amount retirement account owners must withdraw from their IRAs and 401(k)s each year. When you take these withdrawals, you also have to pay taxes on each distribution. Retirement account withdrawals are required after age 70 1/2, except for Roth IRAs, which do not have distribution requirements for the original account owner.

It can be somewhat complicated to calculate your required minimum distribution, especially if you have multiple retirement accounts. If you miss a distribution or withdraw the incorrect amount, you could trigger big tax penalties. “There are tax consequences once you reach the point of taking RMDs,” says Jared Snider, a senior wealth advisor at Exencial Wealth Advisors in Oklahoma City. “The biggest mistakes all relate to taxes.”

Here’s how to prevent some of the most common required minimum distribution mistakes:

Forgetting a RMD

The penalty for missing a required distribution is 50% of the amount that should have been withdrawn in addition to the income tax due. However, only 38% of Americans are aware that they have to take a RMD, according to a 2019 TD Ameritrade survey. “As baby boomers are hitting RMD age, they need to be aware that they need to take a RMD,” says Dara Luber, senior manager of retirement at TD Ameritrade. “It’s likely they are not being educated, or not thinking about retirement or just thinking about the fun things. They are not necessarily focusing on financial needs and planning.”

Failing to Consult a Financial Professional

Required minimum distributions are calculated by dividing your retirement account balance by an IRS estimate of your life expectancy, or perhaps the life expectancy of you and your spouse. Some people need assistance determining their distribution amount. “If you don’t calculate or you don’t calculate correctly, the penalty is 50% (of the RMD),” says Kelly Famiglietta, vice president and partner of retirement plan services at Charles Stephen in Albuquerque, New Mexico. “If you have access to an advisor, that’s the best thing. Get some help.”

Making No Long-Term Plan for Required Withdrawals

RMDs are considered taxable income and can have a big impact on your annual tax bill. Some advance planning can help you minimize taxes on your required withdrawals. “Failure to plan can lead to a variety of errors when it comes to taxes and income,” Snider says. “You may have more income than you want to show up on your tax returns.” If there is no plan, and you have income from other sources, the RMD can push you into a higher tax bracket, which will result in a more expensive tax bill.

Not Realizing That Distributions Count as Income

By increasing your taxable income, the distribution can not only push you into a higher tax bracket, but it can also affect other types of retirement benefits. A required minimum distribution could impact your Medicare premiums, which are based on your income, whether your Social Security payments are taxed and your child’s eligibility for financial aid for college. “If you don’t need to take more out, don’t,” Famiglietta says.

Missing a RMD Deadline

Your first required minimum distribution is due by April 1 of the year after you turn age 70 1/2. But after that, each subsequent RMD is due by Dec. 31. That could mean you have to take two RMDs in the same year, which might result in additional costs. You could be bumped to a higher tax bracket, your Medicare costs could increase and your Social Security benefits could be taxed. “You need to think it through,” Luber says. Some financial advisers recommend taking your first distribution by Dec. 31 in order to avoid two distributions in the same year.

Withdrawing the Wrong Amount

While there are many RMD calculators, Luber suggests using an IRS calculator. Make sure that you are determining the RMD using the account balance on Dec. 31 of the previous year. The correct amount is based on your age, account balance and life expectancy.

Assuming 401(k)s and IRAs Have the Same RMD Rules

The withdrawal rules are different for IRAs and 401(k)s. If you have multiple IRAs, you have to calculate the RMD for each account separately. However, you can aggregate and take your total RMD from just one IRA. The rules are different for 401(k)s, and you have to take a RMD from each 401(k) account. Also, spouses cannot aggregate between their accounts. Each spouse has to withdraw money from his or her own retirement account.

Source: U.S. & World Report News
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New House Bill May Change How You Plan for Retirement

New House Bill May Change How You Plan for Retirement

New House Bill May Change How You Plan for Retirement

The House of Representatives recently passed a bill that may complicate retirement planning options for Americans.

The House passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019 on May 23. If enacted into law, it could be tricky for Americans who are not financially savvy investors.

Some of the changes could benefit consumers: The law encourages more small employers to offer 401(k) plans and raises the age for required minimum distributions (RMDs) from retirement accounts to 72 from 70.5, a nod to longer life expectancies and later retirements.

However, there are some changes that consumers should be wary of, experts say.

For example, one change in the law would shorten the amount of time that someone who inherits an Individual Retirement Account (IRA) can hold onto the funds, potentially causing them to lose money.

“If you inherited my IRA — before I’d be able to stretch the distribution over your lifetime, which is more time for dollars to grow tax deferred. Now you have to drain that inherited IRA over 10 years, which gives you less time to grow the money on a tax-deferred basis,” Dave O’Brien, chair elect of the National Association of Personal Financial Advisors (NAPFA), told ABC News.

Another change that American workers should be wary of, according to consumer advocates, is adding annuities — complex financial tools offered by insurance companies — to 401(k) plans.

Annuities have seen a boom in sales since last June, when the Trump Administration rolled back Obama-era regulations that required financial advisers to put their customers’ interests ahead of their own.

“There will come a time where we will point back to this as the start of a trend toward high-cost annuities being offered in 401(k) plans to the detriment of retirement savers,” Barbara Roper, the director of investor protection at the Consumer Federation of America, told The New York Times.

The new law would let employers off the hook for the outcomes of the annuities, which guarantee some future income but usually charge high fees.

“Putting an annuity in your 401(k) plan adds complexity and cost that small employers and employees do not need. Employees can still buy an annuity when they retire. You don’t need an act to allow people to buy something you’re allowed to buy outside of your retirement plan,” O’Brien said.

Annuities are complex financial tools to which workers can contribute over years, and then get regular payouts in retirement. However, experts say that except for the most sophisticated investors, they are hard to understand.

Annuities are often pitched as similar to a pension because of the regular payouts. But O’Brien calls that a false equivalency.

“People may claim it’s like a pension, it really isn’t. A pension is the employer’s money going in for you. This is the employee’s money going in for expenses,” O’Brien said. “A pension is a highly regulated, retirement benefit that the employer funds. An annuity is a really complicated, expensive insurance product that the employee would buy.”

Annuities are often marketed as tax-deferred savings vehicles.

But, O’Brien said, “your 401(k) is already a tax-deferred vehicle. It kills me when we see an annuity in a tax-deferred IRA because you doubled up.”

Source: ABC News
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A Guide to Your IRA

A Guide to Your IRA Account

A Guide to Your IRA

An IRA can reduce your tax bill when you save for retirement.

You can build a nest egg for retirement faster and more easily if you qualify for tax breaks for your retirement savings. Individual retirement accounts allow workers with earned income to minimize taxes as they save for retirement.

The Benefits of an IRA:

  • Defer paying income tax on traditional IRA deposits.
  • Investment earnings are not taxed each year while the money is in the account.
  • Roth IRAs provide tax-free withdrawals in retirement.

What is an IRA?

An IRA is a retirement saving and investment account that provides tax benefits to participants. While the IRA contribution limits are lower than 401(k) plans, many workers are able to build up a large balance by rolling over their 401(k) plan to an IRA each time they change jobs.

The IRA Contribution Limits

The IRA contribution limit is $6,000 in 2019. Workers age 50 and older can make catch-up contributions of up to an additional $1,000, for a total contribution of $7,000. These limits apply to traditional and Roth IRA deposits and contributions to both types of accounts in the same year.

IRA Eligibility Requirements

You must have earned income to be eligible to contribute to an IRA. However, married couples can fund an IRA in each of their names, even if only one spouse works, by opening a spousal IRA.

Your ability to make a tax-deductible traditional IRA contribution is limited if you have access to a 401(k) plan or similar type of retirement account at work and earn more than $64,000 ($103,000 for couples) and eliminated if you are paid more than $74,000 ($123,000 for couples). If only one member of a married couple has access to a 401(k) plan at work, the IRA tax deduction is phased out if the couple’s income is between $193,000 and $203,000 in 2019.

People age 70 1/2 and older are no longer eligible to get a tax deduction for saving in a traditional IRA, but they can continue to fund a Roth IRA. You can’t make Roth IRA contributions if your income exceeds $137,000 ($203,000 for married couples) in 2019, and the deduction is phased out for those who earn more than $122,000 ($193,000 for couples).

IRA Contribution Deadline

You have until your tax filing deadline, which is usually around April 15, to make an IRA contribution. For deposits made in January through April, you will need to specify whether the contribution is for the previous tax year or the current calendar year. A traditional IRA contribution can be made shortly before filing your taxes in order to reduce the tax you owe or boost your refund.

Should You Use a Traditional or Roth IRA?

Traditional and Roth IRAs have different tax benefits and withdrawal requirements.

Traditional IRA: A traditional IRA allows you to defer paying income tax on your contributions until they are withdrawn from the account. There’s a 10 percent early withdrawal penalty on distributions before age 59 1/2, unless the money is used for several specific purposes, and withdrawals are required after age 70 1/2.

Roth IRA: Roth IRA contributions are made with after-tax dollars. You don’t have to pay tax on the investment earnings in the account each year, and withdrawals after age 59 1/2 from accounts that are at least five years old are tax-free. You can also withdraw your contributions from an account that is at least five years old before age 59 1/2 without penalty if you need it. “The goal is to let these accounts grow tax-free until retirement, but if life happens they have the flexibility to help out the family in a pinch,” says Justin Porter, a certified financial planner and founder of Porter Wealth Management in Calhoun, Georgia. “You can take out your contributions to a Roth IRA tax- and penalty-free.” However, early withdrawals of investment earnings could trigger taxes and penalties. Roth IRA withdrawals are not required in retirement, and heirs may also be eligible for tax-free distributions.

To decide which type of IRA is best for you, compare your current tax rate to an estimate of your retirement tax rate. “The difference between a traditional and Roth IRA is the timing of when taxes are paid,” says Luiz Augusto Pacheco, a certified financial planner at Inva Capital Wealth Management in Miami. “Traditional IRA taxes are due when the investor starts withdrawing from it. Roth IRA taxes are paid upfront. If you have a higher income, the traditional IRA might be a better solution.” If you have a low tax rate now, a Roth IRA allows you to pay your current tax rate on your retirement savings and avoid taxes in the future. You can also hedge your bets about future tax rates by contributing to both types of accounts.

You can open an IRA at most financial institutions, including banks, mutual fund companies and brokerages. Take care to compare several providers before funding an account. IRAs typically have a wide selection of investment options, and you can shop around for the funds you want and reasonable fees. “If an individual prefers the self-directed investing approach, a large discount brokerage firm would be a great place to look,” says Jared Tanimoto, a certified financial planner and president of Ascent Wealth Advisors in Newport Beach, California. “There’s no one best-fit investment type for all investors, but typically low expense ratio ETFs and mutual funds are a great option to look for when investing in a Roth IRA.”

Source: U.S. & World Report News
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A Guide to Self Directed IRAs

A Guide to Self Directed IRAs

A Guide to Self Directed IRAs

Self directed IRAs allow you to hold alternative investments in a retirement account.

A self directed IRA allows investors to hold unique and varied investment options inside a retirement account. Unlike traditional IRAs or Roth IRAs, which often consist of stocks and bonds, a self-directed IRA provides a broader selection of investment options. “As we are floating at all-time highs in the stock market, some investors are beginning to remember some of the wounds they received in the financial crisis of 2007-2008 where they saw their accounts get sliced in half and still paid advisors their traditional commissions,” says Joseph Polakovic, owner and CEO of Castle West Financial in San Diego. “This has led some to look at ways to get a little more hands-on with their qualified investments.”

Using a self-directed IRA as part of a retirement savings strategy requires some research upfront. The following is a guide to self-directed IRAs, including how they work and how to decide if this investment setup is right for you.

What Is a Self-Directed IRA?

In some ways, a self-directed IRA is like a traditional IRA or a Roth IRA. The account is designed to provide tax advantages, and participants must follow the same eligibility requirements and contribution limits. The maximum contribution limit for 2019 is $6,000, or $7,000 if you’re age 50 or older. You’ll be able to start withdrawing funds when you are 59 1/2 years old.

The difference lies in the type of investments you can hold in the account. While a traditional IRA or Roth IRA might be used to invest in CDs or mutual funds, a self-directed IRA can be invested in many other alternatives. Funds in a self-directed IRA might be used for:

  • Real estate.
  • Undeveloped or raw land.
  • Promissory notes.
  • Tax lien certificates.
  • Gold, silver and other precious metals.
  • Cryptocurrency.
  • Water rights.
  • Mineral rights, oil and gas.
  • LLC membership interest.
  • Livestock.

A self-directed IRA is not a plan you manage completely on your own. You’ll need a custodian or trustee to administer the account. “A self-directed IRA is most commonly custodied with a passive custodian,” says John Bowens, a retail sales manager for Equity Trust Company in Westlake, Ohio. Passive custodians do not offer investment advice. The self-directed IRA investor has the responsibility to find and choose an asset, carry out due diligence and direct the investment.

Advantages of Self-Directed IRAs

Investing through a self-directed IRA provides built-in tax breaks on your assets’ earnings. “As with any IRA or retirement account, one benefit is the potential to grow account balances in a tax-advantaged environment for the future,” Bowens says.

This type of account also allows you to pursue an area you might be particularly passionate about. “Knowledge gained through work experience, industry involvement and even hobbies can often be translated into viable investments,” Bowen says. You might use the self-directed IRA to invest in real estate that you then maintain to provide ongoing rental income, or you could invest in a privately held company, horses or bronze.

Diversification is another possible benefit of a self-directed IRA. If you have some funds invested in the stock market, you might opt to place other funds in alternatives like undeveloped land or unsecured loans. This setup could help protect you from potential losses during a market downturn.

Disadvantages of Self-Directed IRAs

Even if you thoroughly research an asset before investing in it through a self-directed IRA, the stakes can be high. “Many of the investments that can be selected may not be regulated, and they tend to be riskier types of investments,” says Denise Nostrom, founder and owner of Diversified Financial Solutions in Medford, New York. While the investments could bring a high return, they also could generate substantial losses.

You’ll also need to be in tune with the details of the account. There are rules regarding who you can interact with using the self-directed IRA. Your family members, for instance, are considered disqualified persons. If you purchase real estate, you’ll want to make sure your parents don’t live in it. You might have to pay penalties or taxes if certain IRS guidelines aren’t followed.

Prohibited transactions through a self-directed IRA can also lead to high fees. If you own a rental property and need to make a repair, you won’t be allowed to pay for the fix out of your own pocket. If you do, the payment could be considered a contribution to the account and you could face penalties.

And while you can invest in a variety of assets through the account, there are limits. You are not allowed to hold life insurance, collectibles like jewelry and antiques or real estate that you live in.

How to Tell if a SDIRA Is Right for You

Since you’ll direct many of the decisions of the account, including managing paperwork, transactions and communicating instructions, a certain level of dedication is needed. “If you aren’t ready to make this your job, then you may regret this decision,” Polakovic says. “There is a good chance there is going to be a lot of upfront learning and will require effort to stay current.”

If you have spent a career in real estate or have been involved in equity and company funding for decades, a self-directed IRA might be a better fit. “Self-directed IRAs can be a phenomenal asset, but the people who seem to have the most amount of success with them are those that enjoy the hobby of deal finding, not those who have now decided to jump into it,” Polakovic says.

Source: U.S. & World Report
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What is a Medicaid Annuity?

What is a Medicaid Annuity?

What is a Medicaid Annuity?

Medicaid-compliant annuities can be a financial lifeline for some seniors.

It’s a precarious situation that many elderly people find themselves in: They need long-term nursing home or assisted living care, but they don’t have enough money to pay for it. So they consider applying for Medicaid, the joint federal-state program that offers health coverage to eligible low-income seniors. But because they have a little too much money to qualify for Medicaid, they try a Medicaid “spend down,” a financial strategy that essentially requires a person to become even more cash-poor. In other words, they get to have their health care paid for but are more broke than ever.

Medicaid spend downs aren’t always as bad as they sound. If you’re helping a parent get rid of their revenue, at least the money they’re spending often goes to things they need, like a new wheelchair or hearing aid. But sometimes they are as bad as they sound. What if your father needs Medicaid to pay for a nursing home but your mother is fine? It’s all well and good to spend money to make your father poorer – he’ll get his needs met at the nursing home. But if you drain your parents’ bank accounts, your mother will have even less to get by on.

That’s why some people opt for a Medicaid-compliant annuity.

What Is a Medicaid Annuity?

An annuity – as you might know – is a fixed sum of money paid every year indefinitely, generally for the rest of a person’s life. When people buy annuities, they’re often deferred, meaning the payout doesn’t come for some time. But Medicaid-compliant annuities are immediate annuities, which are paid out right away, as the name suggests. With a Medicaid-compliant annuity, you give a lump sum of cash to a company in exchange for a guaranteed income stream that will help the spouse who isn’t moving into a nursing home maintain his or her quality of life.

“Medicaid-compliant annuities are the greatest planning tools if you have a loved one in a nursing home and you are trying to get Medicaid benefits,” says Patrick Simasko, a financial advisor and estate planning attorney at Simasko Law in Mount Clemens, Michigan. Still, he says, “they are very complicated, so you definitely need an expert to put a Medicaid plan together.”

How Medicaid-Compliant Annuities Work

Let’s say that your father goes into a nursing home with a monthly bill of $6,000. Your parents have $250,000 in the bank and other countable assets, such as mutual funds and certificates of deposit that could go toward the spend down to help your father become eligible for Medicaid. If your parents use $250,000 to pay the nursing home bills, that money will be gone in less than four years. Medicaid kicks in at that point, so your father’s needs are taken care of, but your mother has been scraping by on her Social Security check and has nothing in the bank account. Meanwhile, she is in good health but not exactly living her best life in retirement.

If your mother invests $150,000 of that $250,000 in a Medicaid-compliant annuity, she still has $100,000 in the bank for reserve funds, which may be allowed for your father to qualify for Medicaid (as of 2019). Medicaid’s Community Spouse Resource Allowance can be as high as $126,420 in most states, but it varies; in South Carolina, for example, the spouse can only keep assets up to $66,480. So along with your mother’s $100,000 in the bank account and her Social Security check, she also gets a Medicaid-compliant annuity of guaranteed monthly income. It won’t be an incredible amount of money – about $1,500 a month in this example – but it’s guaranteed, on top of a monthly Social Security check and perhaps pension income. Your mother is theoretically taken care of every month and still has some money in the bank, while your father qualifies for Medicaid.

Setting Up a Medicaid Annuity

Depending on your comfort level with financial tools like annuities, you may opt to seek professional guidance, such as a financial advisor or elder care attorney.

“It’s not a do-it-yourself proposition,” says Thomas Currey, chair of the board of directors of the consumer education nonprofit Life Happens in Arlington, Virginia. “You should consult an elder care attorney to help you understand it and structure it properly, given the technical nature of what it entails.”

“Taxes come into play. Life expectancies come into play. It’s not just ‘liquidate your accounts and buy the annuity,'” Simasko says.

Still, if you do it correctly, a Medicaid-compliant annuity can be a good solution for couples, when one needs a nursing home and the other doesn’t, Currey says.

“It affords the healthy spouse some means to continue to live with dignity,” he says. But the biggest negative is that not everyone’s life fits into the hypothetical examples you can construct for a Medicaid-compliant annuity to make sense. You need a decent amount of money to buy a Medicaid-compliant annuity that will produce a decent payout, according to Currey. Generally, that’s often around $200,000 to $300,000, he says.

“If you have more assets than that, you’d do much better in the (stock) market,” he says.

Other Factors to Consider

Simasko stresses that if you’re going to look into this option, you want a Medicaid-compliant annuity and not what an insurance salesman may call a “Medicaid-friendly” annuity.

“It’s a sales technique to go get the family member to purchase the annuity in hopes that the money is magically protected, thereby allowing the salesman to generate huge commissions. Do not fall into this trap,” he warns.

And, of course, if you don’t have that much in the bank, it may not make sense to buy any sort of annuity. As noted, this can be a precarious situation.

Source: U.S. & World Report News
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How to Prevent Senior Fraud

How to Prevent Senior Fraud

How to Prevent Senior Fraud

Senior fraud account for 5 million cases in the United States annually, resulting in $27.4 billion in losses.

Most victims don’t report it, due to embarrassment. As awareness of this senior fraud grows, so does the brazenness of those committing the frauds.

Too Trusting = Susceptibility

Seniors seem to be most susceptible to fraud and abuse; they come from a generation that trusted. Baby boomers are more skeptical. But I think as you age, you want to believe in the goodness of people, and that makes you more vulnerable.

Seniors are in more frequent contact with medical professionals who can steal their vital information. My brother-in-law’s identity was stolen by someone who stole a credit card receipt for his inpatient hospital TV service.

A lot of seniors pick up the phone and stay on the phone because they long for someone to talk to. They’re simply lonely. We had a friend whose mother was called by someone asking if they were having problems with their computer. She literally stayed on the phone for an hour and a half with the person. Thankfully she was not compromised in any way, to our knowledge.

The Latest Scams: Start With Social Security

Thirty-five percent of people who were notified that their personal information was involved in a breach in 2017 had their Social Security numbers compromised.

It typically starts with a robocall. Someone writing for AARP actually called the number back and provided fake information just to gauge the process. The caller first asks for your name, address and social security number. The AARP reporter provided fake information but the caller persisted, outlining alleged fraud that happened with that social security number. They try to confuse and scare you. In this particular case, they said that they had to issue a new social security number and that someone would call back. They did, and the caller ID actually read “social security administration.” Bottom line: The caller told the reporter he had to clear his accounts and buy gift cards to purchase bonds, then call them back with the numbers.

According to the U.S. PIRG – Public Interest Research Group – website: “With full name, birth date and Social Security number, a thief can try to open a Social Security account in your name and change your direct deposit information to his or her checking account.” They continue: “Coupled with other information that can easily be found online, such as place of birth, a thief can try to claim your benefits over the phone.”

How Can You Prevent Fraud?

Sign up for a “my Social Security” account and closely monitor it. See instructions at: ssa.gov/pubs/EN-05-10540.pdf.

Log into your Social Security account regularly and check your personal information, such as your address or date of birth. If you see changes, contact the Social Security Administration (800-772-1213 or by email: secure.ssa.gov/emailus).

To report possible fraud or identity theft, contact the Federal Trade Commission and the Senate Select Committee on Aging fraud hotline at 800-303- 9470.

Love Blooms – or Does It?

Romance scams are popular. In 2015, the FTC and Federal Bureau of Investigation’s Internet Crime Complaint Center received more than 21,000 complaints combined, costing victims $204 million.

Senior fraud scammers use social media and dating sites to initiate contact. They quickly move off the dating sites to communicate, spending weeks or months developing relationships. They may send gifts and then ask for small sums of money for supposed minor emergencies in order to test the waters.

They may try to get you to act as a mule, receiving money or goods purchased with stolen credit cards. Some victims have been used to transport drugs.

Warning signs include not being able to meet with the person face to face.

Check the person’s photograph for authenticity: tineye.com and Google’s “search by image” can help you determine if the same picture appears with other names and in other places.

If the person claims to be working for an overseas business, call the U.S. Embassy in the appropriate country to verify.

Do not send money, and don’t provide personal identifying and financial information online or over the phone.

Common Types of Scams

I have only touched the surface of the scams taking place. They include:

  • Telemarketing/phone scams.
  • Medicare fraud.
  • Tax fraud.
  • Funeral and cemetery scams.
  • Internet fraud.
  • Reverse mortgage scams.
  • Sweepstakes and lottery schemes.
  • Grandparent scam.
  • Stealing mail.

Stay Safe: How to Prevent Fraud

The National Council on Aging’s web site is a good resource. And check out the “Dirty Dozen” list of the most common scams; it’s published each year by the IRS.

Prevention is always your best option. Here are some tips:

  • Self-monitor your credit and bank statements, as well as your medical bills.
  • Consider signing up for identity theft protection and identity theft insurance.
  • If you’re hiring anyone to come into the house, conduct background checks.
  • Purchase a home safe or safe-deposit box.
  • Shred, shred, shred your paperwork.
  • Consider a security wallet or handbag that protects against credit card skimming.
  • Get your mail soon after it’s delivered, and stop mail when away. Get statements online. As scary as it sounds, online bill paying is the safest way to go. Be on the alert if your utilities, banks, credit card companies or other businesses stop sending email or paper notifications, as identity thieves often change addresses to hide criminal activity.

Notify the Right Agencies

  • Long-term care identity theft: Report a claim to the long-term care ombudsman in your state, if the theft was a result of a stay in a nursing home or long-term care facility.
  • Medical identity theft: Contact your health insurance company’s fraud department or Medicare’s fraud office.
  • Tax identity theft: Report this type of ID theft to the Internal Revenue Service and your state’s Department of Taxation or Revenue.
  • Notify your credit reporting agencies, financial institutions and retailers.
  • Notify your state consumer protection offices or attorney general.

Fraud, abuse and scams are as old as time and seem to progress us we get older. Instead get smarter. Fight back. And let’s put some people in jail.

Source: U.S. & World Report News
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11 Ways to Avoid the IRA Early Withdrawal Penalty

11 Ways to Avoid the IRA Early Withdrawal Penalty

11 Ways to Avoid the IRA Early Withdrawal Penalty

You don’t have to pay the 10 percent penalty if you use the money for specific purposes.

Distributions from individual retirement accounts before age 59 1/2 typically trigger a 10 percent early withdrawal penalty. However, the IRA withdrawal rules contain several exceptions to the penalty if you meet certain circumstances or spend the money on specific purchases. Here are 11 ways to avoid the IRA early withdrawal penalty:

Delay IRA withdrawals until age 59 1/2

Once you turn age 59 1/2, you can withdraw any amount from your IRA without having to pay the 10 percent penalty. However, regular income tax will still be due on each withdrawal. Traditional IRA distributions are not required until after age 70 1/2.

An IRA withdrawal for medical expenses

IRA distributions used to pay for medical expenses that are not reimbursed by health insurance and exceed 10 percent of your adjusted gross income are not subject to the early withdrawal penalty.

An IRA withdrawal to pay for health insurance

If you lose your job and collect unemployment compensation for 12 consecutive weeks, you can take penalty-free IRA distributions if you use the money to pay for health insurance for you or your spouse or dependents. To qualify for this penalty exception, you must take the distribution in the year you received the unemployment compensation or the following year and before you have been re-employed for 60 days or more.

An IRA withdrawal for college costs

Penalty-free IRA distributions are allowed to pay for college, including tuition, fees, books, supplies and equipment. Room and board also count if the individual attending college is at least a half-time student. Qualifying institutions include colleges, universities and vocational schools eligible to participate in federal student aid programs. However, IRA distributions are considered taxable income and could reduce your eligibility for financial aid.

An IRA withdrawal for a first home purchase

You can withdraw up to $10,000 ($20,000 for couples) from an IRA to buy or build a first home without incurring the early withdrawal penalty. To qualify for the exemption, you must not have owned a home for the two years preceding the home purchase. If the purchase or construction of your home is canceled or delayed, put the money back in your IRA within 120 days of the distribution to avoid the penalty.

An IRA withdrawal to pay for a disability

People with severe physical and mental disabilities who are no longer able to work can take IRA withdrawals without penalty if they can get a physician to sign off on the severity of the condition.

An IRA withdrawal for military service

Members of the military reserves who take an IRA distribution during a period of active duty of more than 179 days do not have to pay a 10 percent penalty on the amount withdrawn.

Set up an annuity

IRA withdrawals taken as a series of annuity payments are not subject to the early withdrawal penalty. The use of an IRS-approved distribution method and at least one withdrawal annually are required to avoid the penalty. The payments are calculated based on your life expectancy or the joint life expectancies of you and your beneficiary, and generally require professional assistance to calculate. If you don’t consistently withdraw the correct amount over the appropriate number of years, penalties could be applied.

A Roth IRA withdrawal

A Roth IRA early withdrawal often has fewer restrictions. You may be able to withdraw your contributions, but not the earnings, from a Roth IRA that is at least five years old without incurring the early withdrawal penalty.

An inherited IRA

If you inherit a traditional IRA before age 59 1/2, you can take penalty-free withdrawals, but will need to pay income tax on each distribution. However, if you inherit an IRA from your spouse and elect to treat it as your own, distributions before age 59 1/2 will be subject to the early withdrawal penalty.

Leave the money in a 401(k)

Workers who leave their jobs in the year they turn 55 or older can withdraw money from their 401(k) without having to pay the 10 percent penalty. But if that money is rolled over to an IRA, you will have to wait until age 59 1/2 to avoid the penalty, unless you qualify for one of the other early withdrawal penalty exceptions.

Source: U.S. & World Report News
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10 Ways to Increase Your Social Security Payments

10 Ways to Increase Your Social Security Payments

10 Ways to Increase Your Social Security Payments

Follow these steps to make sure you will receive the maximum possible Social Security benefit.

The amount of your Social Security payments depends on your earnings history and the age you sign up for benefits. Try these strategies to maximize your payments:

Work for at least 35 years

Social Security benefits are calculated based on the 35 years in which you earn the most. If you don’t work for at least 35 years, zeros are factored into the calculation, which decreases your payout.

Earn more

Increasing your income by asking for a raise or earning income from a side job will increase the amount you receive from Social Security in retirement. Earnings of up to $132,900 in 2019 are used to calculate your retirement payments.

Work until your full retirement age

You need to claim Social Security at your full retirement age, which is 66 or 67 for most current workers, to get your full payments. Monthly payments are permanently reduced for people who sign up for Social Security before their full retirement age.

Delay claiming until age 70

After your full retirement age, payments will increase by about 8 percent for each year you delay claiming Social Security up until age 70. After age 70, there is no additional benefit for waiting to sign up for Social Security.

Claim spousal payments

Spouses may claim benefits based on their own work record or up to 50 percent of the higher earner’s benefit, whichever is higher. If you were married for at least 10 years, you can also claim Social Security benefits based on an ex-spouse’s work record.

Include family

If you have dependent children under age 19, you may be able to secure additional Social Security payments for them worth up to one half of your full retirement benefit to certain annual limits.

Don’t earn too much in retirement

Social Security beneficiaries under their full retirement age who earn more than $17,640 in 2019 will have $1 withheld for every $2 they earn above the limit. The year you turn your full retirement age, the earnings limit jumps to $46,920 and the penalty decreases to $1 withheld for every $3 earned above the limit.

Minimize Social Security taxes

If the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit is more than $25,000 for individuals and $32,000 for couples, up to 50 percent of your Social Security benefit could be taxable. If these income sources top $34,000 ($44,000 for couples), income tax could be due on as much as 85 percent of your Social Security benefit.

Maximize survivor’s benefits

When one member of a married couples dies, the surviving spouse can inherit the deceased spouse’s benefit payment if it’s more than his or her current benefit. Retirees can boost the amount the surviving spouse will receive by delaying claiming Social Security.

Make sure your work counts

Create a My Social Security account and download your Social Security statement annually to check that your earnings history and Social Security taxes paid have been recorded correctly by the Social Security Administration. Make sure you are getting credit for the taxes you’re paying into the system.

Source: U.S & World Report News
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13 Most Frequently Asked Retirement Questions

13 Most Frequently Asked Retirement Questions

13 Most Frequently Asked Retirement Questions

From when to retire to how much to save, here are expert-backed answers to crucial retirement questions.

If retirement is looming in your future, you may wonder about how exactly this next phase of your life will play out. From when to start collecting benefits to how exactly money will end up in your bank account each month, the process of starting retirement can seem like a mystery. To help you understand the key milestones of retirement and allocate funds strategically, you should assess your own financial situation and consider the best ways to maximize benefits.

A few of the key retirement questions workers approaching retirement ask (or should ask) include:

  • How do I retire?
  • When can I retire?
  • How much money do I need to retire?
  • How much will I spend in retirement?
  • Should I retire early?
  • When should I take Social Security?
  • How do I apply for Social Security benefits?
  • How much will I pay in taxes in retirement?
  • Should I take my pension as an annuity or a lump sum?
  • How will I afford medical expenses in retirement?
  • Should I pay off my mortgage before retirement?
  • How should my money be invested once I retire?
  • What will I do in retirement?

Read on for answers to common questions and tips for a comfortable and fulfilling retirement.

How Do I Retire?

Leaving the workplace may be as simple as filling out paperwork with your human resources office, but replacing a paycheck can be more difficult. Kyle Ryan, executive vice president of advisory services for hybrid digital wealth manager Personal Capital, says the No. 1 question he hears from workers is: “Logistically, how am I going to make that happen?” They want to know about how to move from the steady income of the workplace to living off their retirement savings. The answer is usually found by sitting down with a finance professional and determining how much to pull out of retirement accounts and on what schedule.

When Can I Retire?

The short answer: You can retire when you want to leave the workforce and can afford to do so. However, in reality, people may have many constraints on when they can leave the workforce. For instance, some employees may have to work 20 or 30 years to be eligible to receive a company pension. Those who need Social Security to retire can’t begin collecting benefits until age 62 at the earliest. And Medicare doesn’t begin until age 65, meaning workers who receive health insurance through an employer may wait until then to retire.

How Much Money Do I Need to Retire?

It all depends on what you plan to spend in retirement. Gage Kemsley, vice president of financial firm Oxford Wealth Advisors in Rio Rancho, New Mexico, finds it frustrating to hear some financial advisors say a specific amount is needed to retire. Rather than providing a blanket figure such as $1 million or $2 million, Kemsley says people should work with an advisor to determine how much is needed to meet their specific retirement goals.

How Much Will I Spend in Retirement?

To determine how much you need to retire, you need to understand how much you’ll spend. Fortunately, that’s not as hard to calculate as it might seem. “It’s not a guessing game at all,” says Tim Speiss, partner-in-charge of the personal wealth advisors practice with the accounting firm EisnerAmper LLP in New York City. Financial advisors can use a person’s spending habits, expected inflation and life expectancy to determine how much they will reasonably need in retirement.

Should I Retire Early?

No one can answer that but you. However, financial advisors can run through a number of what-if scenarios to help a worker determine the best time to retire from a financial perspective, Ryan says. These scenarios can consider whether retiring early could lead to a shortfall of money later.

When Should I Take Social Security?

Workers can take Social Security as early as age 62, but they will permanently reduce their monthly benefits by 25%. The full retirement age for those born from 1943-1954 is 66, and seniors can get up to an 8% bump in benefits for each year they delay their claim up to age 70.

Those who plan to continue working full-time until their full retirement age should think twice about taking early Social Security benefits. There is a benefits penalty of $1 for every $2 you earn above $17,640 in 2019 if you are younger than the full retirement age. And some may worry about Social Security running out of money and take their benefits early for that reason. However, Kemsley is optimistic that the program isn’t going bankrupt, and these concerns shouldn’t drive the decision of when someone begins benefits.

How Do I Apply for Social Security Benefits?

There are three ways to apply for Social Security benefits. Retirees can complete an online application through the Social Security Administration website or call 1-800-772-1213 to submit an application over the phone. The final option is to visit a local Social Security Administration office and apply in person.

How Much Will I Pay in Taxes in Retirement?

A tax professional can likely estimate your effective tax rate in retirement. Some retirement savings, such as traditional 401(k) or IRA accounts, are taxable, while money from Roth accounts is exempt. Depending on how much income you have in retirement, a portion of your Social Security benefits may be taxable, too. In addition to calculating expected federal taxes, Kemsley advises workers not to overlook state taxes.

Should I Take My Pension as an Annuity or a Lump Sum?

This is a decision best made with the help of a finance and tax professional. Taking a lump sum payout may sound appealing, but Speiss cautions, “You’re going to have a significant tax bite out of that.” Annuitized payments may lessen and spread out the tax burden.

How Will I Afford Medical Expenses in Retirement?

While most retirees are eligible for Medicare at age 65, early retirees may need to bridge the gap between when they lose their workplace benefits and begin their government coverage. That may mean buying an individual policy through the health insurance marketplace. Insurance plans purchased through the marketplace may be eligible for government subsidies that lower out-of-pocket costs for retirees.

A bigger concern is long-term care coverage. “What if you could not live in your own home?” Speiss asks. Medicare doesn’t cover ongoing custodial care such as that provided in assisted living or nursing home facilities. To pay for this, retirees could use long-term care insurance, a reverse mortgage or personal savings. Once someone’s assets have been depleted, Medicaid may provide this coverage to those meeting income requirements.

Should I Pay Off My Mortgage Before Retirement?

For those who itemize deductions, a mortgage interest may reduce taxes. If the interest rate is low enough, it may also make more financial sense to invest money rather than pay off the debt. However, it comes down to personal preference. “It’s important to balance the hard math with what allows you to sleep at night,” Ryan says.

What’s more, retirees need to consider how paying off a mortgage could impact their ability to live comfortably in retirement. “I think it’s a good thing to go into retirement without debt,” Kemsley says,” but I don’t think it makes sense to rob a retirement account of $100,000 to (pay off) a house.”

How Should My Money Be Invested Once I Retire?

Since retirees may be living largely off their savings, that money needs to be protected in case of a recession or market downturn. “We should be more conservative in your retirement,” Kemsley says. However, retirement savings also need to earn enough gains to keep up with inflation. A financial advisor should be able to recommend the right mix of bonds, equities and other investments to keep some money safe while allowing a portion of the portfolio to grow.

What Will I Do in Retirement?

This is the question many workers fail to ask themselves even though it’s essential to a happy retirement. Kemsley has seen many clients spend six months to a year getting acclimated to retirement, only to then find it boring after that. In some cases, they go back to work because they aren’t sure what else to do. Kemsley advises workers approaching retirement to give thought to how they would like to spend these years. He says, “We need to have very specific goals for the time we have.”

Source: U.S. & World Report News
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8 Major Ways The SECURE Act Could Impact Your Retirement Plan

8 Major Ways The SECURE Act Could Impact Your Retirement Plan

8 Major Ways The SECURE Act Could Impact Your Retirement Plan

From the outset, 2019 looked like it might be “The Year Of Retirement Reform” for Congress.

Last year closed out with a number of retirement bills making real headway through DC, committees, think tanks and lobbyists, and we’ve been poised for major legislation to emerge.

And now we have the first real movement of the year: The Setting Every Community Up for Retirement Enhancement Act (SECURE Act) passed in the House with a 417-3 vote on Thursday and is expected to make it through the Senate during this current term.

The SECURE Act would be the first real major retirement legislation since the Pension Protection Act in 2006. This comes after the Tax Cuts and Jobs Act back in 2017 essentially punted on all of the major retirement reform provisions initially discussed in the Trump Administration.

While the bill has essentially 29 new provisions or major changes, I want to focus on just eight areas. One important note: the SECURE Act is not yet finalized. The Senate has a similar bill before it called the Retirement Enhancement Securities Act (RESA), and, as often happens, some of the RESA’s provisions may make their way into the SECURE Act, or parts of the SECURE Act may be modified through committee or other Congressional action before being signed into law.

While the bill does smooth out some minor road blocks to retirement savings – like removing the IRA age limitation, expanding the start date for RMDs, increasing annuity options, and potentially increasing the likelihood of small employers starting retirement plans – there is still a strong argument that these changes, while positive, won’t move the retirement security needle much or at all. Many of the changes can be viewed as only benefiting wealthy IRA owner’s that don’t need their RMDs yet and a clear nod to the product manufacturing lobby.

The major issues facing retirement security for most Americans still come from Social Security funding issues, rising health care costs through skyrocketing drug costs, strains on Medicare and Medicaid, and – with roughly one-third of the American population not really saving for retirement – small modifications to savings plans likely won’t help this group. This is not to say that the SECURE Act provisions aren’t positive changes, just not really going to do much to deal with the real retirement issues facing Americans.

That being said, here are eight major pieces of the current version of the SECURE Act that I think are worth closer examination.

1. Increase Small Employer Access to Retirement Plans

Title 1, Sec. 101 of the bill would make some significant changes to a variety of retirement rules. It would expand the ability to run multi-employer plans and make the process easier overall. It would essentially allow small employers to come together to set up and offer 401(k) plans with less fiduciary liability concern and less cost than exists today.

The goal here is to try to expand small employers’ capability to offer some form of retirement savings to employees. This has generally been a frustration of previous legislative attempts as the SIMPLE and SEP IRAs were developed in part to achieve this outcome, but ultimately have not filled in as a broadly utilized retirement savings plan for small employers. As such, the SECURE Act will take another stab at this huge issue as many small employers offer no retirement savings options at all, leaving the issue solely to the individual.

2. Increase Annuity Options Inside Retirement Plans

Sec. 204 seeks to update the safe harbor provision for plan sponsors to select annuity providers in order to offer in-plan annuities inside of a 401(k). Today, many 401(k)s stay away from annuities, in part because of concerns about liability in picking an annuity provider for the plan. The new rules would essentially ease this liability concern to some degree, potentially opening up the path for more annuities to be offered inside of retirement plans.

3. Increase Required Minimum Distribution Ages

Today the law requires that most individuals take out required minimum distributions (RMDs) from their retirement accounts once you reach age 70.5. The SECURE Act would delay this requirement to age 72. The RESA Act currently in front of the Senate seeks to push RMD requirements even further back to age 75.

However, one criticism of this provision is that it mostly benefits those with significant tax-deferred savings by allowing them to grow this money even longer. Other suggested changes to RMD rules have included allowing smaller accounts, such as those under $100,000, to be exempt from withdrawal requirements for the owner of the account.

4. Removal of Age Limitation on IRA Contributions

For years there has been a rule that essentially discouraged retirement savings in IRAs for people who continued to work later in life. After age 70.5, you could no longer contribute to an IRA, but amazingly, you could still contribute to a Roth IRA. Sec. 114 of the SECURE Act would remove this savings limitation by repealing the age limitation for traditional IRA contributions.

5. Tax Credit for Automatic Enrollment

Sec. 106 introduces a new tax credit of $500 to help some smaller employers encourage automatic enrollment into their retirement plan. This small credit could help offset some of the costs of operating a plan at the beginning. Automatic enrollment has seen great success in increasing plan participation by employees.

6. Penalty-Free Distributions for Birth of Child or Adoption

A really interesting and welcome addition to the bill was a new exemption from the 10 percent penalty tax of 72(t) for early withdrawals from retirement accounts. The new rule, found in Sec. 113, would allow an aggregate amount of $5,000 to be distributed from a retirement plan without the 10 percent penalty in the event of a qualified birth or adoption. The distribution would need to occur within one year of the adoption becoming final or the child being born.

7. Lifetime Income Disclosure for Defined Contribution Plans

The bill would require that defined contributions plans deliver a lifetime income disclosure to participants at least once every 12 months. This lifetime income disclosure would essentially show how much income the lump sum balance in the retirement account could generate.

The methodology for calculating lifetime income is still in the works. Additional disclosures and information on assumptions used would also have to be provided to participants.

8. Removal of “Stretch” Inherited IRA Provisions

The SECURE Act would make significant changes to inherited retirement plans like 401(k)s, traditional IRAs, and Roth IRAs. In the past, beneficiaries of these accounts could typically spread the distributions over their own life expectancy.

However, the new bill includes what is viewed as a tax-generating provision that would require most beneficiaries to distribute the account over a 10-year period. This change would accelerate the depletion of inherited accounts for many large IRAs and retirement plans.

Typically, smaller inherited accounts are liquidated fairly quickly by beneficiaries already. However, the end of the so-called “Stretch” IRA or retirement account makes a lot of sense from a public policy perspective, especially after the Supreme Court has ruled that inherited accounts are not “retirement” accounts.

As such, it does not make policy sense to allow for an extended tax benefit through the beneficiary’s retirement. The RESA bill has a significantly different provision, but would also end the stretch provision for larger inherited IRAs over $450,000.

The potential tax burdens of faster distributions of inherited retirement accounts will increase the need for proper estate planning and potentially more strategic Roth conversions during the life of the account owner, adding additional complexity to retirement and estate planning.

With the SECURE Act headed to the Senate, with nearly across the board support by parties in the House, the likelihood of its eventual passage seems extremely high. However, modifications are likely.

While the SECURE Act makes positive changes, takes a step forward, but doesn’t clearly advance the retirement security of those in most need of a boost.

Source: Forbes
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