11/17/2020 - New tax law changes and the impact of Covid-19 may have left you with some questions. Kali Hassinger, CFP®, CDFA® & Bob Ingram, CFP® explain what you need to know!
How to Finish Financially Strong in 2020
No one could have predicted what 2020 had to offer. The stock market saw wild swings that hadn’t occurred since the 2008 recession. Concerns over Iranian tensions and an oil war quickly took a backseat as Covid 19 spread across the world. Many other notable things happened this year, but let’s discuss how you can end the year financially strong.
Here are the top 8 tips from our financial advisors.
1. Consider rebalancing your portfolio.
The stock market’s major recovery since March may have left your portfolio overweight in some areas or underweight in others. Be sure that you’re taking on the correct amount of risk by rebalancing your long-term asset allocation.
2. Assess your financial goals.
Starting now, assess where you are with the financial goals you’ve set for yourself. Take the necessary steps to help meet your goals before year-end so that you can begin 2021 with a clean slate.
3. Know the estate tax rules.
For those with estates over $5M, be sure to review your potential estate tax exposure under both a Republican and Democrat administration.
4. Review your employer benefits package and retirement plan.
Open enrollment runs from Nov. 1 through Dec. 15. Review your open enrollment benefit package and your employer retirement plan. Don’t gloss over areas such as Group Life and Disability Elections as most Americans are vastly underinsured. Many 401k plans now offer an “auto increase” feature which can increase your contribution 1% each year until the contribution level hits 15%, for example.
5. Take advantage of tax planning opportunities.
Such as tax-loss harvesting in after-tax investment accounts or Roth IRA conversions. Many folks have a lower income in 2020 which could present an opportunity to move some money from a traditional IRA to a Roth IRA while in a slightly lower tax bracket.
6. Boost your cash reserves.
It’s so important to have cash savings to cover unexpected expenses or income loss. Having a solid emergency fund can prevent you from having to sell investments in a down market or from taking on high-interest debt. Ideally, families with two working spouses should have enough cash to cover at least 3 months of expenses. While single income households should have cash to cover six months. Take the opportunity to review your budget and challenge yourself to find additional savings each week through year-end.
7. Contribute more to your retirement plan.
Increase your retirement account contributions for long-term savings, great tax benefits, and free money (aka an employer match).
Contributions you make to an employer pre-tax 401k or 403b are excluded from your taxable income and can grow tax-deferred. Roth account contributions are made after-tax but can grow tax-free.
If your employer plan and financial situation allow for it, you can accelerate your savings from now until the end of the year by setting your contribution level to a high percentage of your income. Many employers allow you to contribute up to 100% of your pay.
8. Give to charity.
Is there a charity you would like to support? Make a charitable donation! Salvation Army and Toys for Tots are popular around this time.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the author and not necessarily those of Raymond James. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Matching contributions from your employer may be subject to a vesting schedule. Please consult with your financial advisor for more information. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty. Contributions to a Roth 401(k) are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Unlike Roth IRAs, Roth 401(k) participants are subject to required minimum distributions at age 72.
What Are The Hidden Costs Of Buying A Home?
Contributed by: Robert Ingram, CFP®
Today’s historically low-interest rates can mean a more affordable mortgage payment. However, when buying a home within your budget, it’s important to consider the costs beyond the mortgage.
Let’s begin with the costs to purchase a home.
Even while carrying a mortgage, you will need to make a down payment. While there are low down payment loans, try to put down at least 20% of the purchase price. Otherwise, your loan may have a higher interest rate and you could face additional monthly costs such as mortgage insurance.
You will have closing costs, which can include things such as loan origination fees for processing and underwriting the mortgage, appraisal costs, inspection fee, title insurance, pre-paid property taxes, and first year’s homeowner’s insurance. Generally, you should expect to pay between 3-5% of the mortgage amount.
Now, you will have ongoing costs to live in your home.
Annual property taxes average about 1% of the home value nationwide, but the tax rates can vary widely depending on the city or town. Keep property taxes top of mind when you are looking at different communities.
Homeowner’s insurance is another annual cost that not only depends on the value of the home and the contents within it you are covering, but also on the state and local community. This cost generally ranges between $500-1,500 per year, sometimes more.
If your home is a condominium or a single family home, you should expect annual or monthly homeowner’s association fees that cover the care of common areas, the grounds, clubhouses, or pools. Depending on the number of amenities and of course the location, average fees range from $200-400 per month.
While you may be used to paying some utilities as a renter, the size of your new home could significantly increase your utility rates. Going from an 800 square-foot apartment to a 2,500 square-foot house could double or triple the costs to heat it, cool it, and to keep the lights on. Add your local area water and sewer fees and your utilities could easily reach $500 per month or more.
Going from renting to homeownership also means having to maintain the new home (both inside and out). Things can be regular ongoing maintenance like lawn care and landscaping, or larger projects like painting, roof repair, furnace, and appliance replacement. Consider the tools and equipment you would need to buy or the services you would hire to do the work.
Finally, there is another hidden cost that can put a dent in your budget, filling up the house. A home with more rooms can mean more spaces that “need” furniture and other decorative touches. The costs of furnishings can be several thousands of dollars to tens of thousands of dollars. Without proper planning, it can be all too easy to rack up those credit card bills and have a mountain of debt as you move into your new home.
Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.
This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Bob Ingram, and not necessarily those of Raymond James. Raymond James Financial Services, Inc. does not provide advice on mortgages. Raymond James and its financial advisors do not solicit or offer residential mortgage products and are unable to accept any residential mortgage loan applications or to offer or negotiate terms of any such loan. You will be referred to a qualified professional for your residential mortgage lending needs.
Do You Know Why 2020 Is A Critical Year For Tax Planning?
Contributed by: Nick Defenthaler, CFP®, RICP®
It’s been quite the year, hasn’t it? 2020 has certainly kicked off the decade in an interesting fashion. In addition to the coronavirus quarantine, it’s also a year that required a significant amount of tax planning and forward-thinking. Why is this year so unique as it relates to taxes? Great question, let's dive in!
SECURE Act
The SECURE ACT was passed in late December 2019 and became effective in 2020. The most meaningful part of the SECURE Act was the elimination of the stretch IRA provision for most non-spouse IRA beneficiaries. Non-spouse beneficiaries now only have a 10-year window to deplete the account which will likely result in the beneficiary being thrust into a higher tax bracket. This update has made many retirees re-think their distribution planning strategy as well as reconsider who they are naming as beneficiaries on certain accounts, given the beneficiary’s current and future tax bracket. Click HERE to read more about this change.
CARES Act
Fast forward to March, the CARES Act was passed. This critical stimulus bill provided direct payments to most Americans, extended and increased unemployment benefits, and outlined the parameters for the Paycheck Protection Program for small business relief. Also, another important aspect of the CARES Act was the suspension of Required Minimum Distributions (RMDs) for 2020. This isn’t the first time this has occurred. Back in 2009, RMDs were suspended to provide relief for retirees given the “Great Recession” and financial crisis. However, the reality is that for most Americans who are over 70 1/2 and subject to RMDs (RMDs now begin at age 72 starting in 2020 due to the SECURE Act), actually need the distributions for cash flow purposes. That said, for those retirees who have other income sources (ex. Social Security, large pensions, etc.) and investment accounts to cover cash flow and don’t necessarily “need” their RMD for the year for cash flow, 2020 presents a unique planning opportunity. Not having the RMD from your IRA or 401k flow through to your tax return as income could reduce your overall income tax bracket and also lower your future Medicare premiums (Part B & D premiums are based on your Modified Adjusted Gross Income). We have seen plenty of cases, however, that still make the case for the client to take their RMD or at least a portion of it given their current and projected future tax bracket. There is certainly no “one size fits all” approach with this one and coordination with your financial planner and tax professional is ideal to ensure the best strategy is employed for you.
Lower Income In 2020
Income for many Americans is lower this year for a myriad of reasons. For those clients still working, it could be due to a pay cut, furlough, or layoff. Unfortunately, we have received several dozen calls and e-mails from clients informing us that they have been affected by one of the aforementioned events. In anomaly years where income is much less than the norm, it presents an opportunity to accelerate income (typically though IRA distributions, Roth IRA conversions, or capital gain harvesting). Every situation is unique so you should chat with your planner about these strategies if you have unfortunately seen a meaningful reduction in pay.
Thankfully, the market has seen an incredible recovery since mid-March and most diversified portfolios are very close to their January 1st starting balances. However, income generated in after-tax investment accounts through dividends and interest are down a bit given dividend cuts by large corporations and because of our historically low interest rate environment. We were also were very proactive in March and April with a strategy known as tax-loss harvesting, so your capital gain exposure may be muted this year. Many folks will even have losses to carry over into 2021 and beyond which can help offset other forms of income. For these reasons, accelerating income could also be something to consider.
Higher Tax Rates In 2021, A Very Possible Scenario
Given current polling numbers, a Democratic sweep seems like a plausible outcome. If this occurs, many analysts are predicting that current, historically low rates could expire effective January 1, 2021. We obviously won’t know how this plays out until November, but if tax rates are expected to see a meaningful increase from where there are now, accelerating income should be explored. Converting money from a Traditional IRA to a Roth IRA or moving funds from a pre-tax, Traditional IRA to an after-tax investment account (assuming you are over the age of 59 1/2 to avoid a 10% early withdrawal penalty) eliminates the future uncertainty of the taxes on those dollars converted or distributed. Ever since the Tax Cuts and Jobs Act was passed in late 2017 and went into law in 2018, we have been taking a close look at these strategies for clients as the low tax rates are set to expire on January 1, 2026. However, if taxes have a very real chance of going back to higher levels as soon as 2021, a more aggressive income acceleration plan could be prudent.
As you can see, there have been many moving parts and items to consider related to tax planning for 2020. While we spend a great deal of our time managing the investments within your portfolio, our team is also looking at how all of these new laws and ever-changing tax landscape can impact your wealth as well. In our opinion, good tax planning doesn’t mean getting your current year’s tax liability as low as humanly possible. It’s about looking at many different aspects of your plan, including your current income, philanthropy goals, future income, and tax considerations as well as considering the individuals or organizations that will one day inherit your wealth and helping you pay the least amount of tax over your entire lifetime.
Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.
All investments are subject to risk. There is no assurance that any investment strategy will be successful. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion. Raymond James and its advisors do not offer tax or legal advice. You should discuss any tax or legal matters with the appropriate professional.
What You Need to Know About the RMDs Deadline Extension
Contributed by: Robert Ingram, CFP®
To combat the economic impact of COVID-19, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act on March 27, 2020. The more than 2 trillion dollar stimulus package contained numerous provisions including an expansion of unemployment benefits, tax credit direct payments to qualified individuals, financial support to small businesses/healthcare facilities/state and local governments, and some changes to retirement account rules. One of the provisions affecting retirement accounts was to suspend Required Minimum Distributions (RMDs) for 2020. Individuals subject to RMDs for qualified retirement plans such as 401(k), 403(b) and IRA accounts are not required to take distributions this year (including beneficiaries owning inherited IRAs who were still subject to annual RMDs).
What does this suspension of RMDs mean for individuals who have already taken distributions prior to the CARES Act, but would not have if given the choice? If you have taken a distribution before March 27 is there a way to reverse or ‘undo’ the distribution?
Expanding The 60-Day Rollover Window For 2020
A retirement account owner that takes possession of a distribution from the account has 60 days from the date of withdrawal to complete a rollover into another eligible retirement account, for example, a rollover to an IRA. Doing so excludes the distribution from income that could be subject to taxes and penalties. This is referred to as the 60-day rollover rule; the IRS allows this one time per 12-month period. Please note that the one time per year rule does NOT apply to direct rollovers such a direct 401(k) rollover to an IRA.
Individuals who took a retirement account distribution prior to March 27 and were still within the 60 days since taking the distribution could have used the 60-day rollover rule to put their distribution back into their respective accounts, classifying it as a rollover. However, this window was very limited.
In April, the IRS issued the first notice of guidance extending the 60-day rollover rule in 2020:
What qualified?
Distributions taken on or after February 1, 2020 could be rolled over into the retirement account.
When must the distribution be rolled over into the retirement account?
The later of
60 days after receiving the distribution
July 15, 2020
This provided greater flexibility for individuals that had taken an RMD after January 31. However, it still did not cover those that received an RMD in January. Individuals that had already completed a once per year 60-day rollover within the last 12-months would also have been ineligible to use this rollover rule again to reverse their RMD. In addition, this rollover window would not apply to non-spouse beneficiaries with inherited IRA accounts, since rollovers are not allowed for those accounts.
IRS Extends Rollover Deadline For All RMDs Made In 2020 To August 31st
In June, the IRS issued further guidance that essentially allows all RMDs that have been taken in 2020 to be repaid. This IRS notice 2020-51 does the following:
Rollover deadline has been extended to August 31, 2020 and covers RMDs taken any time in 2020. This allows those who have taken RMDs as early as January to put the funds back into their retirement accounts by rolling over the funds if it is completed by August 31st.
This rollover to reverse RMDs taken in 2020 does not count as part of the once per year 60-day rollover. This would allow individuals to use the rollover to prepay their RMDs regardless of whether they had already used a 60-day rollover within the last 12 months.
Provides an exception allowing non-spouse beneficiaries to return RMDs to their Inherited IRAs in 2020.
A couple of points of note when considering repaying your RMDs taken this year
The IRS notice 2020-51 only applies to distributions representing your Required Minimum Distribution amount. Distributions other than your RMD amounts would be subject to the once per year 60-day rollover rule.
If you had federal or state taxes withheld when you took your required minimum distribution, these amounts cannot be reversed and returned from the federal or state treasuries. You could return your total gross RMD back to your retirement account, but it would have to be made out-of-pocket. Any excess withholding would be resolved next year when you file your 2020 tax returns.
While reversing this year’s required minimum distributions may provide some great benefits such as potentially lowering your taxable income in 2020 or allowing for a Roth IRA conversion as an alternative, everyone’s financial situation and tax planning needs are unique. For some folks, it could make sense to take RMDs if they expect higher income in the future that could fall in a higher tax bracket, for example.
Having a good conversation with your advisors can help you decide what is right for you. As always, if you have any questions, please don’t hesitate to reach out!
Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.
The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Raymond James does not provide tax or legal services. Please discuss these matters with the appropriate professional. Conversions from IRA to Roth may be subject to its own five-year holding period. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals of contributions along with any earnings are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
Should I worry if my 401k savings are down?
Contributed by: Robert Ingram, CFP®
It can be scary when financial markets are volatile and selloffs happen. Understandably, many are concerned about how COVID-19 will impact the economy, our health, and our financial security. These fears and the volatile markets that follow can temp retirement savers to make drastic changes to their investment portfolios; some may even cease investing entirely. For example, if you watch your 401(k) continue to lose value, you may want to stop contributing. However, I’ll explain why you should stick with your current long-term savings and investment plan.
Why Its Beneficial to Keep Contributing
Contributing to a retirement plan like a 401(k) or 403(b) is still one of the best ways for most Americans to save and build wealth for retirement, particularly in times of economic uncertainty.
Tax Benefits
Contributions to most 401(k) plans are made pre-tax, meaning these amounts are excluded from your taxable income in the year they are made. This reduces your current income taxes. It also allows those savings to grow tax-deferred year-after-year until they are withdrawn.
Employer plans that offer a Roth designated account (i.e. a Roth 401(k) or Roth 403(b)) can present a great opportunity for investing. Roth contributions are made after-tax, so those amounts do not reduce your taxable income like the 401(k) does. However, those savings grow tax-deferred. The withdrawals and earnings are tax-exempt, provided you are at least age 59 ½ and have held the account for at least 5 years. This tax-free growth can be a powerful tool, especially for individuals that may be in a higher income tax bracket in the future.
Opportunity To Buy Low
For investors that are still contributing to their plans, a downturn in markets actually presents an opportunity to invest new savings into funds at lower prices. This allows the same amount of contributions to buy more shares. As markets and economic conditions rebound, you will have accumulated more shares of investments that could grow in value.
Matching Contributions
Need another incentive to keep those contributions going? Don’t forget about opportunities to receive employer matching with retirement plans. If your employer offers a 401(k) match, you would receive additional savings on top of your own contributions. Let’s say your employer matches 50% on contributions you make up to 6% of your salary. By putting 6% of your income into your 401(k), your employer would contribute an extra 3%. That’s like earning a 50% return on your invested contributions immediately. Those extra contributions can then buy additional shares which can also compound over time.
Should I Ever Consider Stopping Contributions?
Even in a booming economy and during the strongest bull market, it’s important to have a strong financial foundation in place before deciding to invest over the long-term. Having key elements of your day-day-finances as stable as possible is necessary as we navigate the incredible challenges created by COVID-19. A few examples include:
Control Over Your Cash Flow
Do you know exactly how much money you earn and spend? Understanding where your income exceeds your expenses gives you the fuel to power your savings. How secure is your employment? Are you in an industry directly or indirectly impacted by the economic shutdowns due to COVID-19? What would happen to your cash flow if you had a reduced income? If there are other expenses you could cut in order to maintain your contributions, you should still try to contribute. However, if you need every dollar possible to pay your bills, you would have no choice but to suspend your 401(k) contributions.
Cash For Any Short-Term Needs
Having cash reserves is a critical part of a sound financial plan. If an unexpected expense occurs or you had a loss of income, be sure to have cash savings to draw from rather than being forced to sell investments that may less valuable or to use credit cards with high-interest debt. If your savings is less than a month’s worth of normal expenses, you should consider focusing your efforts on reinforcing your cash reserve rather than on your retirement plan. Then, ideally, you should work towards building 3 to 6 months’ expenses for your emergency fund as you continue to save for retirement or other goals.
Tackling Your Debt
If you have high-interest rate debt that you are working to pay off and are unable to find additional savings in your budget to increase your payment amounts, it could make sense to redirect your retirement plan contributions to pay the debt down first. On the other hand, if your employer offers a company match, you should still consider contributing at least enough to get the full amount of matching dollars (remember that free money could see a return of 50% or more). You could then redirect any amounts you are contributing above that maximum match percentage.
Your situation and needs are unique to you. It’s important to work closely with a financial advisor when making decisions, especially in these incredibly difficult times.
Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.
Keep in mind that investing involves risk and you may incur a profit or loss regardless of strategy selected. Past performance does not guarantee future results.
What’s the Difference Between a Roth and a Traditional IRA?
Contributed by: Kali Hassinger, CFP®, CDFA®
Many are focused on filing their taxes by April 15th, but that day is also the deadline to make a 2019 IRA contribution! With only a week left, how will you decide between making a Roth or a traditional IRA contribution? There are pros and cons to each type of retirement account, but your individual situation will determine the better option. Keep in mind, the IRS has rules to dictate who can make contributions, and when.
2019 Roth IRA Contribution Rules/Limits
For single filers, the modified adjusted gross income (MAGI) limit is phased out between $122,000 and $137,000.
For married filing jointly, the MAGI limit is phased out between $193,000 and $203,000
Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified retirement plan at work (401k, 403b, etc.), you simply have to be under the income thresholds.
The maximum contribution is $6,000 for those under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.
2019 Traditional IRA Contributions
For single filers covered by a company retirement plan, the deduction is phased out between $64,000 and $74,000 of MAGI.
For married filers covered by a company retirement plan, the deduction is phased out between $103,000 and $123,000 of MAGI.
For married filers not covered by a company plan, but have a spouse who is, the deduction for your IRA contribution is phased out between $193,000 and $203,000 of MAGI.
The maximum contribution is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.
Now, you may be wondering what type makes more sense for you (if you are eligible). Well, like many financial questions…it depends!
Roth IRA Advantage
The benefit of a Roth IRA is that money grows tax deferred. So, when you are over age 59 1/2 and have held the money for 5 years, the money you take out is tax free. However, in exchange for tax free money, you don’t get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future.
Traditional IRA Advantage
With a traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, a married couple filing jointly has a MAGI of $190,000 putting them in a 24% marginal tax bracket. If they made a full $6,000 traditional IRA contribution they would save $1,440 in taxes. To make that same $6,000 contribution to a Roth, they would need to earn $7,895 to pay 24% in taxes in order to then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it later in life when you begin making withdrawals in retirement. Withdrawals taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.
Pay Now or Pay Later?
Future tax rates make it challenging to choose what account type is right for you. If you go the Roth IRA route, you will pay your tax bill now. The downside is that you could find yourself in a lower tax bracket in retirement. In that case, it would have been more lucrative to take the other route. And vice versa.
How Do I Decide?
We typically recommend Roth contributions to young professionals because their income will most likely increase over the years. However, if you need tax savings now, a traditional contribution may make more sense. A traditional IRA may be the best choice if your income is stable and you’re in a higher tax bracket. However, you could be disqualified from making contributions based on access to other retirement plans.
As always, before making any final decisions, it’s always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you.
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
SECURE Act: Potential Trust Planning Pitfall
Contributed by: Josh Bitel, CFP®
Does the SECURE Act affect your retirement accounts? If you’re not sure, let’s figure it out together.
Just about 2 months ago, the Senate passed the SECURE (Setting Every Community Up for Retirement Enhancement) Act. The legislation has many layers to it, some of which may impact your financial plan.
One major change is the elimination of ‘stretch’ distributions for non-spouse beneficiaries of retirement accounts such as IRAs. This means that retirement accounts inherited by children or any other non-spousal individuals at least 10 years younger than the deceased account owner must deplete the entire account no later than 10 years after the date of death. Prior to the SECURE Act, beneficiaries were able to ‘stretch’ out distributions over their lifetime, as long as they withdraw the minimum required amount from the account each year based on their age. This allowed for greater flexibility and control over the tax implications of these distributions.
What if your beneficiary is a trust?
Prior to this new law, a see-through trust was a sensible planning tool for retirement account holders, as it gives owners post-mortem control over how their assets are distributed to beneficiaries. These trusts often contained language that allowed heirs to only distribute the minimum required amount each year as the IRS dictated. However, now that stretch IRAs are no longer permitted, ‘required distributions’ are no longer in place until the 10th year after death, in which case the IRS requires the entire account to be emptied. This could potentially create a major tax implication for inherited account holders. All trusts are not created equally, so 2020 is a great year to get back in touch with your estate planning attorney to make sure your plan is bullet proof.
It is important to note that if you already have an IRA from which you have been taking stretch distributions from, you are grandfathered into using this provision, so no changes are needed. Other exemptions from this 10-year distribution rule are spouses, individual beneficiaries less than 10 years younger than the account holder, and disabled or chronically ill beneficiaries. Also exempt are 501(c)(3) charitable organizations and minor children who inherit accounts prior to age 18 or 21 (depending on the state) – once they reach that specified age, the 10-year rule will apply from that point, however.
Still uncertain if the SECURE Act impacts you? Reach out to your financial advisor or contact us. We are happy to help.
Josh Bitel, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® He conducts financial planning analysis for clients and has a special interest in retirement income analysis.
Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
RMDs Waived In 2020! Should I Make A Withdrawal Anyway?
Contributed by: Kali Hassinger, CFP®
If you read through our CARES Act blog you may have noticed a brief mention of the fact that Required Minimum Distributions are suspended for 2020. This change applies to all retirement accounts subject to RMDs such as IRAs, employer-sponsored plans like 401(k)s, and 403(b)s, and inherited retirement accounts.
If you are among the fortunate who only take RMD withdrawals because they are required, the CARES Act presents a real financial planning opportunity for 2020! The reduction in your income provides some wiggle room to implement other tax, income, and generational strategies.
ROTH CONVERSION
Moving money from a tax-deferred account to a tax-exempt account like a Roth IRA is a great long-term strategy to consider. Typically, RMDs must be withdrawn from the retirement account before any additional funds are allowed to be converted.
Account holders could now, in theory, convert their typical RMD amount into a Roth. Your taxable income wouldn’t be any higher than you’ve most likely planned for this year and you get the benefit of the Roth tax treatment in the future. Roth conversions are especially favorable with accounts that will ultimately be inherited by children/family members who are in higher tax brackets or if your IRA balance is significant. The SECURE Act of 2019 changed the rules for inherited retirement accounts, they are no longer able to be stretched out over the lifetime of the beneficiary. Now, a beneficiary must withdrawal the entire account balance within ten years of inheritance. Distributing a tax-deferred retirement account in ten years, which has often taken a lifetime to accumulate, could create substantial taxable income for the beneficiary.
Roth funds, however, maintain their tax-free withdrawal treatment from generation to generation!
Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.
TURN ON OTHER INCOME
For many in retirement, managing income to remain consistent is an integral part of their financial plan. In years when income fluctuates up, taxes due and Medicare premiums can be negatively impacted. The suspension of RMDs provides the opportunity to act on some of the strategies that you may be avoiding because of the tax implications. Non-Qualified Annuity withdrawals, for example, are taxed on a last-in, first-out basis. That means that growth is assumed to come out first and is taxable as ordinary income (note: the taxation of annuitized accounts differs). If you’ve been holding off on accessing a Non-Qualified Annuity to avoid the additional tax, this year could be an excellent opportunity to make a withdrawal instead of taking your RMD!
HARVEST GAINS
We’ve seen our fair share of market losses so far this year, and harvesting investment losses is an effective tax reduction strategy. However, for those who aren’t taking RMDs this year, it could be an opportunity to harvest gains instead. It isn’t uncommon to hold onto long-term investments, not necessarily because they are still desirable, but to avoid the capital gain taxation.
If annual income is reduced by your RMD amount, there may be some wiggle room to lock-in those profits in a tax-efficient manner.
FILL UP YOUR TAX BRACKET
The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been, historically withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term.
The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been historically, withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term. For those who have already taken their RMD for the year and wish they hadn’t, there are some options to reverse the withdrawal. The most straight forward choice, if the withdrawal occurred within the last 60 days, is to treat it as a 60 days rollover & redeposit the funds. It’s important to remember that you are only allowed one 60 day rollover per year. If you’re outside of that 60-day window, however, there is a CARES Act provision that allows COVID-19 related hardship withdrawals to be repaid within the next three years. This provision is expected to be broadly interpreted, but we do not have clarity on whether this hardship provision will apply to RMDs.
Be sure to discuss the options surrounding RMDs with both your financial planner and taxpreparer. Any income and tax changes should be examined before making a decision. Many times, reviewing your financial plan and goals can be a helpful exercise in determining what strategy is best for you!
Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.
Retirement Planning Challenges for Women: How to Face Them and Take Action
Contributed by: Sandra Adams, CFP®
If we are being completely honest, planning and saving for retirement seems to be more and more challenging these days – for everyone. No longer are the days of guaranteed pensions, so it’s on us to save for our own retirement. Even though we try our best to save…life happens and we accumulate more expenses along the way. Our kids grow up (and maybe not out!). Our older adult parents may need our help (both time and money). Depending on our age, grandchildren might creep into the picture. Add it all up and the question is: how are we are supposed to retire? We need enough to potentially last 25 to 30 years (depending on our life expectancy). Ughhh!
While these issues certainly impact both men and women, the impact on women can be tenfold. Let’s take a look at some of the major issues women face when it comes to retirement planning.
1. Women have fewer years of earned income than men
Women tend to be the caregivers for children and other family members. This ultimately means that women have longer employment gaps as they take time off work to care for their family. The result: less earned income, retirement savings, and Social Security earnings. It can also halt career trajectory.
Action Steps
Attempt to save at a higher rate during the years you ARE working. It allows you to keep pace with your male counterparts. Take a look at the chart below for an estimated percentage of what working women should save during each period of their life.
If you are married you may want to save in a ROTH IRA or IRA (with spousal contributions) each year, even if you are not in the workforce.
If you are serving as the caregiver for a family member, consider having a Paid Caregiver Contract drawn up to receive legitimate and reportable payment for your services. This could potentially help you and help your family member work towards receiving government benefits in the future, if and when needed.
2. Women earn less than men
For every $1 a man makes, a woman in a similar position earns 82¢ according to the Bureau of Labor Statistics. As a result, women see less in retirement savings and Social Security benefits based on earning less.
Action Steps
Again, save more during the years you are working. Attempt to maximize contributions to employer plans. Also, make annual contributions to ROTH IRA/IRAs and after-tax investment accounts.
Invest in an appropriate allocation for your long term investment portfolio, keeping in mind your potential life expectancy.
Be an advocate for yourself and your women cohorts when it comes to requesting equal pay for equal work.
3. Women are less aggressive investors than men
In general, women tend to be more conservative investors than men. Analyses of 401(k) and IRA accounts of men and women of every age range show distinctly more conservative allocations for women. Especially for women, who may have longer life expectancies, it’s imperative to incorporate appropriate asset allocations with the ability for assets to outpace inflation and grow over the long term.
Action Steps
Work with an advisor to determine the most appropriate long term asset allocation for your overall portfolio, keeping in mind your potential longevity, potential retirement income needs, and risk tolerance.
Become knowledgeable and educated on investment and financial planning topics so that you can be in control of your future financial decisions, with the help of a good financial advisor.
4. Women tend to live longer than men
Women have fewer years to save and more years to save for. The average life expectancy is 81 for women and 76 for men according to the Centers for Disease Control and Prevention. Since women live longer, they must factor in the health care costs that come along with those years.
Action Steps
Plan to save as much as possible.
Invest appropriately for a long life expectancy.
Work with an advisor to make smart financial decisions related to potential income sources (coordinate spousal benefits, Social Security, pensions, etc.)
Make sure you have a strong and updated estate plan.
Take care of your health to lessen the cost of future healthcare.
Plan early for Long Term Care (look into Long Term Care insurance, if it makes sense for you and if health allows).
5. Women who are divorced often face specific challenges and are less likely to marry after “gray divorce” (divorce after 50)
From a financial perspective, divorce tends to negatively impact women far more than it does men. The average woman’s standard of living drops 27% after divorce while the man’s increases 10% according to the American Sociological Review. That’s due to various reasons such as earnings inequalities, care of children, uneven division of assets, etc.
The rate of divorce for the 50+ population has nearly doubled since the 1990s according to the Pew Research Center. The study also indicates that a large percentage of women who experienced a gray divorce do not remarry; these women remain in a lower income lifestyle and less likely to have support from a partner as they age.
Action Steps
Work with a sound advisor during the divorce process, one who specializes in the financial side of divorce such as a Certified Divorce Financial Analyst (CDFA) (Note: attorneys often do not understand the financial implications of the divorce settlement).
6. Women are more likely to be subject to elder abuse
Women live longer and are often unmarried or alone. They may not be as sophisticated with financial issues. They may be lonely and vulnerable.
Action Items
If you are an older adult, put safeguards in place to protect yourself from Financial Fraud and abuse. For example: check your credit report annually and utilize credit monitoring services like EverSafe.
Have your estate planning documents updated, particularly your Durable Powers of Attorney documents, so that those that you trust are in charge of your affairs if you become unable to handle them yourself.
If you are in a position of assisting an older adult friend or relative, check in on them often. Watch for changes in their situations or behavior and do background checks on anyone providing services.
While it is unlikely that the retirement challenges facing women will disappear anytime soon, taking action can certainly help to minimize the impact they can have on women’s overall retirement planning goals. I have no doubt that with a little extra planning, and a little help from a quality financial advisor/professional partner, women will be able to successfully meet their retirement goals.
If you or someone you know are in need of professional guidance, please give us a call. We are always happy to help.
Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.
Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Raymond James is not affiliated with EverSafe.
The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. These policies have exclusions and/or limitations. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.