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IRA & Retirement Planning Topics

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Avoiding 72(t) Mistakes in 5 Easy Steps

What are 72(t) payments?

72(t) payments are a series of substantially equal periodic payments made from an IRA that can be used to avoid the 10% penalty for early distributions. Payments must last the greater of 5 years or until the IRA owner reaches age 59½. When using a 72(t) schedule, a number of changes are prohibited. If these changes occur, the 10% penalty (and interest) is applied retroactively to all distributions made prior to age 59½.

Here are 5 steps to avoiding 72(t) mistakes:

1. Separate your accounts first. When you establish a 72(t) payment plan, the distributions can be calculated using the balance(s) of one or more IRA accounts. But once the 72(t) schedule is in place, the rules significantly restrict your ability to make changes to the accounts without incurring penalties. So, split your IRA account(s) before you set up the plan. Leave only the minimum amount needed to produce your desired payment in accounts used to calculate the distributions.

2. Make sure to wait a full 5 years. 72(t) payments must be maintained for at least 5 full years after the date of the first distribution. If you are taking distributions annually, this DOES NOT mean that after your fifth distribution, you’re done. You must wait until the end of the fifth year before making any transactions that would result in a modification.

3. Do not add to or subtract from accounts. Other than by the 72(t) distributions themselves, once a 72(t) payment plan is established, the account balance can only be changed by the earnings and losses within the account. NO additional contributions(including any rollovers or direct transfers) into the account may be made, and NO additional distributions can be taken.

4. Try to avoid them. The 72(t) distribution rules are extremely restrictive and in most cases should only be used as a last resort. Before setting up these plans, be sure you’ve exhausted all of your other options. You may want to consider a home equity loan or check to see if your 401(k) or other plan offers a loan feature.

5. No rollovers or conversions of payments. Sometimes financial circumstances change after the 72(t) payment schedule has been set up and the distributions are no longer needed. 72(t) payments cannot be rolled over into another (or the same) IRA and they cannot be converted to a Roth IRA. Instead, consider using the funds to start a “rainy day fund” in a non-retirement account in case another financial hardship occurs.

Questions? Click here to contact the office nearest you.

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Bring Home the Bacon Now, Enjoy Breakfast in Retirement

Something as simple as a pound of bacon can demonstrate the power of compound interest as it relates to your retirement savings. Say you buy a pound of bacon every week, year after year. If you contribute just a bit more money than the amount you spend on bacon to your retirement each year, you could add a sizable amount to your nest egg, especially if you start early.

To see how your “bacon” can grow and better understand the power of compounding, click here to download “Bring Home the Bacon Now, Enjoy Breakfast in Retirement.”

If you have questions about contributing to your retirement plan, click here to contact the office nearest you.

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Navigating Qualified Charitable Distributions in 5 Easy Steps

Using a QCD may significantly increase your tax savings under the new higher standard deduction. However, not everyone is eligible to do a QCD, and if you are, there are certain rules that apply.

What is a qualified charitable distribution (QCD)?

A QCD is a distribution from an IRA that goes directly to a qualifying charity and is not included in the taxable income of the IRA owner. A QCD cannot be made from an employer plan. A QCD can be up to $100,000 a year, per individual. Under the new tax law, QCDs are more valuable than ever.

1. Either an IRA owner or a beneficiary can do a QCD. The individual must be at least age70 ½ at the time of the transaction. Reaching age 70½ later in the year is not enough. Bothspouses can do a QCD when each spouse does the QCD from their own IRA.

2. A QCD can be made from an IRA, an inactive SEP or SIMPLE IRA, or a Roth IRA. Only pre-tax amounts can be used for a QCD, which makes the use of Roth funds veryunlikely. The QCD must be a direct transfer to a qualifying charity. A check payable tothe charity but sent to the IRA owner will qualify as a QCD, as will a check written from a“checkbook IRA” to a qualifying charity. If an IRA owner receives a check payable to themfrom their IRA and then later gives those funds to charity, that is not considered a QCD.

3. A charity must be a qualifying charity. It cannot be a donor-advised fund or a privatefoundation. A gift to a charitable gift annuity will also not qualify. A QCD to a charity where theIRA owner has an outstanding pledge will qualify and will not create a prohibited transaction.The QCD must satisfy all charitable deduction rules. If a distribution to a charity is more than$100,000, the amount over $100,000 is taxable to the IRA owner and is deductible on theowner’s income tax return. The excess amount cannot be carried over to a future tax year.

4. A QCD can satisfy a required minimum distribution (RMD). It is not limited to theamount of the RMD, but is capped at $100,000 a year. If an RMD is more than $100,000, anyamounts in excess of the QCD are taxable to the IRA owner.

5. The IRA custodian has no special tax reporting for a QCD. The QCD will be reportedon Form 1099-R as a regular distribution. The IRA owner will include the QCD amount on line15a of Form 1040. On line 15b, they will exclude the amount of the QCD and put the lettersQCD on that line. The amount of the QCD is thus excluded from the owner’s taxable income.The IRA owner also cannot take a charitable deduction for the QCD amount.


For more information on QCDs and other key areas of retirement planning, click here to contact the office nearest you.

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Choosing the Right Financial Advisor in 5 Easy Steps

Preparing for retirement can be overwhelming, and between tax, estate, insurance, and investment planning, some important aspects of your financial plan can be easily overlooked if you’re not working with a competent professional. A qualified financial advisor can help you ensure that all items are being considered, but not all advisors are created equal. So how do you decide who to work with?

With endless options available, choosing a financial advisor can be difficult. However, there are certain qualities to look for to help you narrow down your choices and make sure you find a qualified advisor that best fits your needs.

Why do you need a financial advisor? Today’s financial landscape is as complicated as ever. A good financial advisor can help you navigate this complexity so that you can make educated, informed decisions on what is best for you and your family. 

1. Ask for references. Ask your CPA or estate planning attorney. In many cases, they already have a working relationship with a financial advisor. You should also consider asking friends and family members for a recommendation if they are in a similar stage of life and financial situation. 

2. Don’t overemphasize credentials. It seems as though there are many credentials available to financial advisors. Some credentials require significant levels of education, passing scores on exams and adherence to strict codes of professional conduct. Many credentials, however, can be earned with virtually no effort or education at all. The bottom line is that the decision of what financial advisor to hire should be made based on more than just the letters after their name. 

3. Find a specialist. The term “Financial Advisor” is highly generic and can be used to describe many different types of professionals in the financial services field. When shopping around, find an advisor who specializes in your area of concern. If you had a heart problem, would you rather see your family doctor or a cardiologist? The same principle should apply to your financial advisor. 

4. Ask about education/training. Most financial advisors routinely participate in what are called “advanced training” classes. Many times these classes are heavy on sales training and light on “real” education. If you really want to know what your advisor has studied, ask to see the manual from the last educational conference he or she attended. If it has more sales information than technical information... Beware!

5. Don’t be afraid to get a second opinion. Your IRA, 401(k) or other retirement account may be the largest single asset you own. If you’re not sure about the advice you’ve been given, don’t be afraid to get a second opinion. If an advisor tells you that there’s no need for one, they’re probably not confident in the information and recommendations they provided to you in the first place. 

Questions? Click here to contact the office nearest you.

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What You Need to Know About Your Required Beginning Date (RBD)

You’ve likely already heard about required minimum distributions (RMDs), but do you know what your required beginning date (RBD) is? Your RBD is the date by which you must begin to take RMDs from your retirement account if you have an IRA or employer plan. It is important to note that the rules differ depending on the type of retirement account you have and whether you are the account owner or the beneficiary.

Click here for more on what you need to know about your required beginning date (RBD).

What is the Required Beginning Date?

This is your due date for beginning to take required minimum distributions (RMDs) from your retirement account if you have an IRA or employer plan. The rules differ depending on the type of retirement account you have or if you are the account owner or the beneficiary.


THE IRA RBD

  • The RBD for IRA owners is April 1 of the year after you turn age 70 ½.
  • You may not have a required distribution in the year you turn 70. It all depends on your birthday. June 30 (halfway through the year) is the cut-off to determine if you use age 70 or age 71 to calculate your distribution.
  • You can defer your first RMD until April 1 of the year after you turn age 70 ½. However, that means you would be taking two RMDs in the same year.

There are drawbacks to waiting:

  • You may pay a higher tax rate.
  • More of your Social Security income could become taxable.
  • You may lose tax exemptions and deductions. Schedule a meeting to determine if this is the right move for you.


THE EMPLOYER PLAN RBD

The rules are generally the same as the IRA RBD, except for the “still working exception.”

You don’t have to take an RMD:

  • If you work past age 70 ½;
  • And you are covered by an employer plan of your current employer;
  • And the employer plan allows the exception.

The RBD is April 1 of the year after separation from service. If you separate from service this year, you can defer the 2018 RMD until April 1, 2019.

The exception does not apply to other employer plans or IRAs you may have. You MUST still take RMDs from those other plans.

Exceptions to the exceptions: If you own more than 5% of the company for which you work, you must take an RMD. If you have an employer SEP or SIMPLE IRA, you must follow the IRA rules, which means, you must take an RMD at age 70 ½.


THE RBD AND DEATH DISTRIBUTIONS

If you inherit a retirement plan from an individual who passed away prior to his or her required beginning date, you will not have to take an RMD for the year of death.

The RBD matters after an account owner dies when the estate is the beneficiary of the IRA at death.

  • If the IRA owner dies before his or her RBD, the distribution period follows the 5-year rule.
  • If the IRA owner dies on or after his or her RBD, the distribution period is the remaining life expectancy of the IRA owner.

The RBD for a named non-spouse beneficiary is December 31 of the year after the account owner’s death. The RBD for a named spouse beneficiary varies. Call me to discuss your situation.

Have more questions about your retirement account distributions? Click here to contact the office nearest you.

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UPDATE!! Roth Conversions: No More Do-Overs

One of the many sweeping changes resulting from the new tax law is that you can no longer recharacterize, or undo, a conversion from a traditional IRA to a Roth IRA. Thus, under the new law, Roth conversions are irrevocable.

What does this mean for you?

You may determine a Roth conversion is right for you after working with a qualified financial professional to consider a variety of factors, including when you will need the money and your current tax rate. When you convert, you are liable for income tax on the amount converted.

Until the passing of the new tax law, you had until October 15 of the year following the conversion to change your mind. Reasons for wanting to undo a Roth conversion might include a decline in value of the converted funds or a change in life circumstances that leave you unwilling or unable to pay the tax on the conversion. With the new law, however, the decision is permanent.

The key takeaway is that before you do a Roth conversion, you must be sure that you have the funds to pay the projected tax bill on the conversion.

Given its permanence, the decision to convert your traditional IRA to a Roth IRA will require careful planning. It is more important than ever to be working with an advisor who is well-trained in the intricacies of laws that impact retirement accounts.

Feel free to call our office to schedule a time to discuss your retirement account. Click here to contact the office nearest you.

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Calculating your RMD (Required Minimum Distribution)

One of the greatest advantages of retirement savings accounts are the opportunities for tax-deferred or tax-free growth; however, the government sets a time limit on how long these benefits can last by way of establishing required minimum distributions (RMDs). An RMD is the minimum amount that must be taken out of your retirement accounts each year, typically beginning in the year that you turn 70½.

Taking your first RMD can be a daunting endeavor as you attempt to navigate the complex rules and regulations surrounding your retirement account and, unfortunately, one wrong move could leave you facing a 50% penalty. Taking the right steps to calculate your RMD correctly can help ensure you avoid any costly mistakes. 

To avoid unnecessary tax penalties, click here to download “Calculating your RMD in 5 Easy Steps.”

For professional assistance with your RMD calculations and distribution requirements, click here to contact the office nearest you.

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Avoiding Charitable IRA Beneficiary Mistakes in 5 Easy Steps

Can IRAs be used to benefit a charity?

IRAs can be a great source of funds to provide a benefit for a favorite charity, but using these funds can create a number of traps that must be avoided in order to maximize benefits to both the charity and other IRA beneficiaries.

Are you considering donating your retirement assets to a charity? Naming a non-profit organization as an IRA beneficiary may be something you’ve yet to consider, but doing so can benefit both you and your charity, as neither of you will pay income tax on the account. However, using a retirement account for charitable gifting can also create a number of traps for both the charity and other IRA beneficiaries.

From determining how to properly name your charity as an IRA beneficiary to separating accounts for each intended heir, there are certain steps that should be taken when naming a charitable beneficiary.

Here's how you can avoid charitable IRA beneficiary mistakes in five steps:

#1 - Name the charity directly on your beneficiary form.  The money will go directly to the charity, avoiding both the time and expense of probate.  Additionally, the distribution to the charity will not be considered income to the estate of the deceased IRA owner.

#2 - Set up separate accounts.  Consider transferring the portion you intend to leave to charity into a separate IRA account.  If other beneficiaries inherit the same IRA as a charity and the charity’s portion is not “cashed out” or split within the IRS prescribed time frames, the stretch IRA for the living beneficiaries will be lost.

#3 - Reverse your bequests.  If you have made provisions for certain charities under your will and also have retirement plans, an effective tax strategy would be to reverse the bequests with non-retirement assets.  This way, the charity receives the same amount that you were going to leave them in your will, but your heirs will end up with more, because the money they will inherit will not be subject to income tax, as the retirement plan would be.

#4 - Don’t convert assets you plan to leave to a charity.  Many charitable organizations and religious groups are structured tax-exempt organizations.  When an IRA is left to one of these charities, the charity does not have to pay income tax on the distribution as other beneficiaries would.  As a result, if you intend to leave your IRA to charity, converting it to a Roth IRA is generally not a wise move.  Why pay income tax on the conversion when the money will be going to the charity tax free anyway?

#5 - Beware of naming a charity as a trust beneficiary.  A charity is known as a “non-designated beneficiary,” because it does not have a life expectancy.  In general, trusts are also non-designated beneficiaries.  Certain trusts, known as see-through (or look-through) trusts allow for post-death distributions to be stretched based on the trust beneficiary with the shortest remaining life expectancy.  Since a charity has no life expectancy, if it is named as a beneficiary of a trust that is also inheriting an IRA, it can eliminate the stretch for the remaining trust beneficiaries.

Interested in learning more about IRA planning strategies? Make sure to contact us so that we can share more with you. Click here to contact our office nearest you.

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Fixing a Missed RMD in 5 Easy Steps

Once you reach age 70½ , the government requires that a specific minimum amount be withdrawn from your retirement account each year. If you miss the deadline or don’t take enough, Uncle Sam could hit you with a 50% penalty!

Did you forget to take a required minimum distribution (RMD) from your retirement account?

Unsure of how to fix the error? Make sure to consult your adviser as soon as possible. Click here to contact us. Fortunately, you’re not the first person to forget to take a distribution. There are steps you can take to fix the problem and possibly even get the penalty waived. We are here to help you do that. 

What is a missed RMD (required minimum distribution)?

RMDs must be taken by IRA owners beginning in the year they turn age 70 ½ and by IRA and non-spouse Roth beneficiaries beginning in the year after the death of the account owner.  RMDs not taken are subject to a penalty of 50% of the amount not taken each year.

When should you look for a missed RMD?

You should look for a missed RMD every year after an account owner turns age 70 ½ and when an IRA or non-spouse Roth beneficiary inherits an IRA.  Ask your advisor to double check any calculations to be sure they are correct.

#1 - Look at the balance sheet.  Determine the prior year-end IRA balance for the year that an RMD was not fully satisfied.  (Note: There were no IRA RMDs for 2009.)

#2 - Determine the life expectancy factor for all missed years.  IRA owners use their age each year and look up the corresponding factor on the Uniform Lifetime Table.  Non-spouse IRA beneficiaries use their age only in the year after the account owner’s death and look up the corresponding factor on the Single Life Expectancy Table.  In each subsequent year, a beneficiary will subtract one from the previous year’s factor.  (Remember: These are the general rules for determining life expectancy factors.  There are many exceptions to these rules.)

#3 - Do some simple math.  Divide the account balance by the life expectancy factor for each missed year’s RMD and withdraw that amount from the IRA.

#4 - Important forms to file.  File IRS Form 5329 for each missed RMD to report the missed distribution and penalty.  The penalty can be waived for good cause.  Attach a letter to the form requesting a waiver.  It is helpful to include language in your letter explaining to the IRS why the distributions were missed, that the problem has been corrected and that procedures are in place to avoid future problems.

#5 - It will never happen again.  Set up procedures to ensure you take future RMDs.  Many custodians offer an option to distribute RMDs automatically each year.  If you struggle to remember to take your RMD, setting up an automatic distribution may be beneficial.


Remember, we are here to guide you through protecting your hard earned assets. Click here to contact us. 

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