Retirement Planning
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Developing a Retirement Plan
It is never too early to start saving for your retirement. There are various ways to contribute to your retirement savings. The amount of your contribution depends on your individual situation and circumstances. Are you contributing as an individual, or are you contributing as an employee or are you contributing as the employer?
As an individual, who has earned income, you can contribute to a Traditional or a Roth Individual Retirement Account (IRA) Traditional or Roth, the maximum statutory contribution for 2018: $5,500 (if over age 50 an additional catch up amount of $1,000). Please be aware Roth IRA contributions are subject to income phase out limits.
As an employee that has access to an employer that offers a retirement plan: 401(k), 403(b), or a Simple IRA. The statutory limits allow you to elect to defer (contribute) up to $18,500 (if over age 50 an additional catch up amount of $6,000) to a 401(k) and 403(b) plan and up to $12,500 (if over age 50 an additional catch up amount of $3,000) for a Simple IRA.
If your are contributing as an employer/ business owner there are multiple options, please give us a call to discuss. As you can see there are various ways to save for your retirement, please give us a call and we can assist you in working through what are the best options for you to get started with your retirement savings.
There are various types of retirement plans and the set up dates depend on the type of plan that is being established (adopted) by the individual and/or employer.
The various types of plans are:
Qualified plans: Defined Benefit (also known as DB Plan), also includes cash balance plans and Defined Contribution Plans, which include: 401(k), profit sharing, money purchase, and stock ownership (ESOP). Both of these types of plans must be set up (adopted) by the last day of the employer’s year.
Plane not classified as Qualified: SEP IRA Plan: must be established by the tax-filing deadline of the business including extension. IRA’s (Traditional and Roth) required to be set up by the tax filing deadline of the individual, usually 4/15. (Does not include extensions) and Simple IRA- required to be adopted no later than 10/1 of the year the plan is put in place. Retirement plans can be complicated and knowing what your options are is a crucial factor in determining what the correct plan is for you. Please reach out to us and we can assist you in what plan is best suited for you.
The first step is to decide what you realistically want to achieve financially. Financial goals might include early retirement, travel, a vacation home, securing your family's financial comfort on the death of a bread-winner, planning for the care of elderly relatives or building a family business.
We work with many of our clients, individuals and businesses assisting them in planning for retirement. We assist in collecting the data and information required to complete projections and work with you and/or your financial advisors to guide you through the process.
Once we have the big picture and projections completed we can work with you to help reduce your potential taxes during your retirement. It is never too early to start planning for your retirement needs, so please contact us to discuss your individual situation and how we can assist you.
The following rules of thumb may work for some people, but they do not make financial sense for everyone. What is more important is to be able to know whether a particular rule of thumb suits your situation. Here are six of the more common rules along with some considerations that should not be overlooked.
- Life insurance should equal five times your yearly salary
This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you need to buy for your particular situation. The amount of life insurance you need depends on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and a few other factors. - Save 10 percent of your salary per year
You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in life, for instance in their 40s, need to save at least 15 or 20 percent per year. - Contribute as much as you can to retirement plans
This makes sense for most people, but if you've accumulated a large amount of money in a retirement plan, say close to a million dollars, you may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives. - You need 80 percent of your pre-retirement income to retire comfortably
Although people may need 80 percent of their salaries during the first few years of retirement, later on, they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and other factors. - Subtract your age from 100 and invest that percentage in stocks
This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating percentages among various types of investments depends on your investment goals and needs and your willingness to risk your capital. In this case, rules of thumb do not serve the investor very well at all. - Maintain an emergency fund of six months' worth of expenses
Depending on your family's situation, three months' worth of expenses might be enough. On the other hand, for some families, even six months' worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short-term loan and how much money you have in savings and investments among other things.
Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and then calculate what you'll need to do to fulfill them.
With more women remaining single, nearly half of all marriages ending in divorce, and the odds of becoming a widow by the age of 55 hovering around 75 percent, nearly 9 out of 10 women will be solely responsible for their financial well-being at some point in their lives. But many are ill-prepared to do so.
Here are several areas where women fall behind when it comes to planning for their financial future:
- Women save considerably less for retirement, on average 60 percent less than men according to a 2010 study conducted by LIMRA of close to 2,500 employees. This is significant because women typically live longer than their male counterparts and need more retirement savings.
- In that same LIMRA study, 29 percent of men and only 14 percent of women consider themselves knowledgeable about financial services and products. Fifty-four percent of women felt at least somewhat knowledgeable about financial products and services, but nearly three-quarters of men felt the same way.
- And, in 2011 a Harris Interactive survey commissioned by RocketLawyer.com found that of the more than 1,000 people surveyed, 5 percent of the women do not have a will, 26 percent of them citing cost as the primary reason they don't have one.
In 2016, 18 million adults were cohabiting, according to a new Pew Research Center analysis of the Current Population Survey. This represents an increase of 29 percent since 2007. Because unmarried couples don't enjoy the same legal rights and protection as married couples do, financial planning considerations for issues such as retirement planning, estate planning, and taxes can be quite different. For example:
- Unmarried partners do not automatically inherit each other's property. When an unmarried partner dies intestate (without a will) the estate is divided according to laws of the state, with property and assets typically going to parents or siblings and rarely or never to the beloved partner. In other words, married couples who do not have a will have state intestacy laws to back them up, but unmarried couples need to have a will in place in order to make sure that their wishes are met.
- Couples who aren't married also do not have the right to speak for each other in the event of a medical crisis. If your life partner loses consciousness or becomes incapacitated, someone has to make a decision whether to go ahead with a medical procedure. That person should be you, but unless you have a health care directive such as a living will in place, you have no legal right to make decisions for your partner.
- Tax and estate issues are also more complicated. In most cases, it makes more sense not to own property such as a car or electronics equipment together or to have a joint loan. Whereas marital assets can be divided equally by a judge, there is no legal recourse for unmarried couples in the event of a breakup. Another example is home ownership. If one partner is listed as the sole owner of a home that the couple lives in together and he or she dies, the surviving partner might be left homeless. This can be resolved by properly titling assets, in this case making sure the home is in joint tenancy with rights of survivorship.
Retirement Assets
Yes, generally under the same rules that would apply to your withdrawals of the same amounts had you lived--unless it's a Roth IRA. A Roth IRA is exempt from federal income tax as long as the account was opened five years before any withdrawals were taken.
Also, your spouse can rollover your account to his or her IRA. No early withdrawal penalty applies, regardless of your beneficiary's age, but a spouse who rolled over to an IRA may owe an early withdrawal penalty on IRA withdrawals taken before age 59 ½.
Only a small percentage of estates (based on the value of one's assets at death, and including large lifetime gifts) are subject to the estate tax and there is no estate tax on assets passing to a surviving spouse or charity. However, if the estate is subject to federal estate tax, (except in 2010, when there was no estate tax) you can deduct the portion of the federal estate tax that is attributed to the IRA. You also won't have to pay tax on the portion of withdrawals that are attributed to any nondeductible contributions made to the IRA.
No. The estate is taxed on the annuity's present value.
You can minimize or eliminate tax on inherited retirement assets by using the following methods:
- Leave them to your spouse. This saves money owed to estate tax and helps postpone withdrawals subject to income tax--provided your spouse takes no withdrawals before age 59 ½.
- Leave them to charity. Although there's no financial benefit to the family, again, this saves income and estate taxes.
- Leave them to family for life, with the remainder to charity in the form of a charitable remainder trust. This reduces estate tax with some benefits to family.
- Provide life insurance to pay estate tax on retirement assets. The benefit of this option is that it provides estate liquidity, avoiding taxable distributions to pay estate tax.
If your assets are in a tax-favored retirement fund such as a company or Keogh pension or profit-sharing plan (including thrift and savings plans), 401(k), IRA or stock bonus plan when it comes time to take distributions you have several options:
- Take everything in a lump sum
- Keep the money in the account, with regular distributions or withdrawals on an as-needed basis
- Purchase an annuity with all or part of the funds
- Take a partial withdrawal (leaving the balance for withdrawal later)
- Take a rollover distribution
- A combination of any of the above
Your retirement assets may be distributed in kind as employer stock, or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans, for instance, annuities are more common with pension plans. Other types of plan favor the other options, but for the most part most of these options are available for most plans. And more than likely, you'll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.
Timing your withdrawal can be a factor, too. Withdrawals before age 59 ½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 70 ½ or face a tax penalty. The only exceptions are Roth IRAs and non-owner-employees still working beyond that age.
Retirement plans offer the biggest tax shelter in the federal system since funds grow tax-free while in the plan. But the shelter is primarily intended for retirement. So when you reach 70 1/2 (or shortly thereafter), you must start to withdraw from the plan.
The shelter can continue for a large part of those assets, for a long time, assuming you don't need them to live on. You can spread withdrawals over a period based on, but longer than, your life expectancy, for example, over a period of at least 27.4 years if you're 70 1/2 now. You are free, however, to withdraw at a faster rate--or even all of it--if you wish. The shelter continues for whatever is not withdrawn.
Generally, yes. Persons you have named as your plan beneficiaries can withdraw over their life expectancies (or more rapidly if they wish). The withdrawal period is generally shorter where no individual beneficiary is named (for example, where your estate is the beneficiary), but your spouse can sometimes spread withdrawals over a longer period.
A reverse mortgage is a type of home equity loan that allows you to convert some of the equity in your home into cash while you retain home ownership. Reverse mortgages work much like traditional mortgages, only in reverse. Rather than making a payment to your lender each month, the lender pays you. Most reverse mortgages do not require any repayment of principal, interest, or servicing fees for as long as you live in your home.
Retired people may want to consider the reverse mortgage as a way to generate cash flow. A reverse mortgage allows homeowners age 62 and over to remain in their homes while using their built-up equity for any purpose: to make repairs, keep up with property taxes or simply pay their bills.
Reverse mortgages are rising-debt loans, which means that the interest is added to the principal loan balance each month (because it is not paid on a current basis). Therefore, the total amount of interest you owe increases significantly with time as the interest compounds. Reverse mortgages also use up some or all of the equity in your home.
All three types of loan plans, whether FHA-insured, lender-insured, or uninsured charge origination fees and closing costs. Insured plans also charge insurance premiums, and some impose mortgage servicing charges.
Finally, homeowners should realize that if they're forced to move soon after taking the mortgage (because of illness, for example), they'll almost certainly end up with a great deal less equity to live on than if they had simply sold the house outright. That is particularly true for loans that are terminated in five years or less.
Retirement Plan Distributions
If your assets are in a tax-favored retirement fund such as a company or Keogh pension or profit-sharing plan (including thrift and savings plans), 401(k), IRA or stock bonus plan, when it comes time to take distributions you have several options:
- Take everything in a lump sum
- Keep the money in the account, with regular distributions or withdrawals on an as-needed basis
- Purchase an annuity with all or part of the funds
- Take a partial withdrawal (leaving the balance for withdrawal later)
- Take a rollover distribution
- A combination of any of the above
Your retirement assets may be distributed in kind-as employer stock, or an annuity or insurance contract. Sometimes certain withdrawal options may be associated with certain retirement plans, for instance, annuities are more common with pension plans. Other types of plan favor the other options, but for the most part most of these options are available for most plans. And more than likely, you'll want to preserve the tax shelter as long as possible by withdrawing no more than you need at any given time.
Timing your withdrawal can be a factor, too. Withdrawals before age 59 ½ risk a tax penalty. At the other end, withdrawals are generally required to start at age 70 ½ or face a tax penalty. The only exceptions are Roth IRAs and non-owner-employees still working beyond that age.
Your personal needs should decide. You may need a lump sum to buy a retirement home or retirement business. If your employer requires that you take a lump sum distribution, it may be wise to roll it over into an IRA.
There are several things you might do depending upon your needs:
- If you don't need the assets to live on, try to continue the tax shelter and leave the money where it is.
- Transfer or roll over the assets into your new employer's plan--if that plan allows it (this can be tricky, though).
- If you've decided to start your own business, set up a Keogh and move the funds there.
- Roll them over into your IRA.
In general, employer plans such as your 401(k), IRAs and pension plan funds are protected from general creditors unless you've used these assets as securities against a loan or you are entering into bankruptcy. If this is the case, there's a chance they could be seized, but if the money is in a registered IRA, pension plan, or 401(k), it's more than likely they will be protected in case of bankruptcy (subject to state and federal law of course).
Each state is different, but in general, consider the following:
- While withdrawals are generally taxable in states with income tax, some offer relief for retirement income, up to a specified dollar amount.
- If your state doesn't allow deductions for Keogh or IRA investments allowed under federal law, these investments and sometimes more may come back tax-free.
- State tax penalties for early withdrawal (before 59 ½) or inadequate withdrawal (after age 70 ½) are unlikely.
Money from retirement plans, including 401(k)s, IRAs, company pensions and other plans, is taxed according to your residence when you receive it.
If you move from a state with a high income tax, such as New York, to one with little or no income tax (Texas, Nevada and Florida have none), you will indeed save money on state income tax.
However, establishing residence in a new state may take as long as one year; if you retain property in both states, you may owe taxes to both.
IRAs
An Individual Retirement Account (IRA) is a type of savings account that is designed to assist you in saving for retirement and provides some tax advantages. There are various types of IRA’s that an individual has access to depending on their circumstances and employment which include: Traditional, Roth, SEP, SIMPLE, and Educational IRA’s. An educational IRA is not a retirement vehicle, but works in a similar manner.
There are various tax advantages for having and IRA and they are easy to set up are. But depending on you individual situation one IRA may be more advantageous then another. Please contact us, we can assist you in determining what type of IRA is be best suited for you.
The amount of withholding that an individual may want to have withheld on their IRA withdrawal depends on your individual circumstances and the type of IRA you have. There are various IRA’s that an individual may have which effects how the withdrawal from the IRA is taxed.
The types of IRA’s are as follows: Traditional deductible IRA, Traditional non-deductible IRA, Roth IRA, and an Educational IRA (also known as Coverdell IRA) . As you can see with there various types of IRA's, the withholding requirements will be different for each individuals situation.
Therefore, for each situation the amount of federal and/or state income tax you should have withheld depends upon what your individual ordinary or marginal income tax rate is to determine if any withholding is required. We would be glad to assist you regarding your IRA’s or in calculating your withholding amounts, please feel free to contact us.
That depends on your particular needs and circumstances. Here are some reasons you might want to roll over distributions to your IRA:
- You want to, or have to, take a distribution from your employer's plan and want these funds to continue to grow tax-free in your own IRA.
- As a self-employed, you are terminating your Keogh plan or retiring from business and want to continue the tax shelter for these distributions.
- You are the beneficiary of a deceased person's retirement plan and want to continue the tax shelter for these distributions in your own IRA.
Here are some of the disadvantages of an IRA rollover:
- Rollovers from company or Keogh plans may take away your spouse's right to share in plan assets.
- IRAs can't claim the limited tax relief allowed on lump-sum distributions.
Tip: To avoid tax hassles, rollovers should be done between the trustees of the plans involved. In other words, the check should not be made out to you personally, but to the trustee of the rollover account.
Traditional vs. Roth IRA
There are two types of IRAs, Traditional IRAs and Roth IRAs, both of which are discussed in this Financial Guide. Traditional IRAs defer taxation of investment income and withdrawals are taxable income--except for withdrawals of previously non-deductible contributions. In most cases, however, contributions are deductible. Roth IRAs are subject to many of the same rules as Traditional IRAs, but there are several differences, the primary one being that contributions are not deductible and are made after tax. As such, qualified distributions are generally tax-free.
If you have income from wages or self-employment income, you can contribute up to $5,500 in 2018 (same as 2017). As such, IRAs are available even to children who meet these conditions. Persons age 50 and older can contribute an additional $1,000 for a total of $6,500 in 2018.
Yes. Contributions of $5,500 for each spouse are allowed in 2018 (same as 2017) if the couple's wages or self-employment earnings are $11,000 or more.
Roth IRAs offer the following advantages:
- Withdrawals, if they qualify, are completely exempt from income tax, unlike all other retirement plans.
- You can quickly build up a Roth IRA account by converting traditional IRAs into Roth IRAs, but there is a tax cost.
- Since there is no age requirement for withdrawals from a Roth IRA, more money can be left in an account and passed on to heirs than is allowed under other plans.
Not everyone can have a Roth IRA. The following conditions apply:
- You can't contribute to a Roth IRA for a year with income (AGI) above $135,000 if single or $199,000 on a joint return in 2018 ($133,000 and $196,000, respectively, in 2017).
- You must have earnings from personal services (at least $5,500 or more) to make the (maximum) contribution, although an additional contribution of $1,000 is allowed for persons age 50 and over.
Yes, subject to the income conditions above. This allows contributions of $5,500 each if the couple's earnings are at least $11,000 in 2018 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older).
Yes, for a child with personal service earnings, and subject to the other income conditions.
The following is a brief list of negative issues regarding Roth IRAs:
- Roth IRA contributions are not tax deductible. There's never a deduction for Roth IRA contributions.
- To build a sizable Roth IRA fund, you must convert a traditional IRA (or, after 2007, funds from an employer plan). Conversions are taxable.
There is no longer an income limit for taxpayers who want to convert a traditional IRA to a Roth IRA as was the case prior to 2010. Starting in 2010, however, all taxpayers were able to convert a regular IRA to a Roth IRA without regard for income. The conversion was a taxable distribution which could be taken into income in 2010 or averaged over the next two years (until 2012). The conversion was not subject to the 10 percent early distribution penalty. Congress passed the removal of the $100,000 MAGI ceiling under unusual circumstances.
In 2011 however, the rules changed again and taxpayers who converted to Roth IRAs must pay taxes on the conversion income at that time instead of deferring it in later years as was the case in 2010. In other words, you must include in your gross income distributions from a traditional IRA the amount that you would have had to include in income if you had not converted them into a Roth IRA. These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. Special rules apply for conversions made in tax year 2010.
Under the new tax reform law, for taxable years beginning after December 31, 2017, if a contribution to a regular IRA has been converted into a contribution to a Roth IRA, it can no longer be converted back into a contribution to a regular IRA. This provision prevents a taxpayer from using recharacterization to unwind a Roth conversion.
The income limit was permanently removed starting in 2010. Anyone, even those with high incomes, can convert from a traditional IRA to a Roth IRA.
When you convert from a traditional IRA to a Roth IRA you pay taxes on the value of your account as of the conversion date. If your account loses value and the account is worth less money you'll end up paying taxes on money you no longer have in your account.
Say you convert $50,000 in a traditional IRA to a Roth IRA and the value drops to $35,000. If you didn't make any nondeductible contributions, the taxable distribution would be $50,000 and that would be the amount you would be paying taxes on. However, now your account is only worth $35,000. By re-characterizing the account you can avoid paying taxes on money you no longer have ($50,000). You'll be back to a traditional IRA, but of course, the account is now worth only $35,000.
Prior to 2018, the IRS allowed you "re-characterize" the account back to a traditional IRA, essentially putting you right back where you were—at least tax wise. However, tax reform legislation passed in 2017 repealed this special rule and re-characterizations are no longer permitted.
Your heirs are taxed as follows:
- No income tax whatever, if the funds have been in the Roth IRA at least five years.
- The heir can spread the withdrawal over his or her life, continuing the tax shelter for amounts not withdrawn.
- Estate tax treatment is the same as for traditional IRAs.
An individual who is determined by the Social Security Administration to be "disabled" receives an Award Letter, which is a notice of decision that explains how much the disability benefit will be and when payments start. It also tells you when you can expect your condition to be reviewed to see if there has been any improvement.
If family members are eligible, they will receive a separate notice and a booklet about things they need to know.
Under the Social Security disability insurance program (title II of the Act), there are three basic categories of individuals who can qualify for benefits on the basis of disability:
- A disabled insured worker under full retirement age.
- An individual disabled since childhood (before age 22) who is a dependent of a parent entitled to title II disability or retirement benefits or was a dependent of a deceased insured parent.
- Disabled widow or widower, age 50-60 if the deceased spouse was insured under Social Security.
- Been disabled or expected to be disabled for at least 12 months
- Has filed an application for benefits, and
- Completed a five month waiting period; however, the 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI. In addition, if you become disabled a second time within five years after your previous disability benefits stopped, there is no waiting period before benefits start.
Under title XVI, or SSI, there are two basic categories under which a financially needy person can get payments based on disability:
- An adult age 18 or over who is disabled.
- Child (under age 18) who is disabled.
For all individuals applying for disability benefits under title II, and for adults applying under title XVI, the definition of disability is the same. The law defines disability as the inability to engage in any substantial gainful activity (SGA) by reason of any medically determinable physical or mental impairment(s) which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.
Meeting this definition under Social Security is difficult. Insured means that you have accumulated sufficient credits in the Social Security system. Visit the Social Security Administration's Website to apply for an estimate.
If you are getting disability benefits on your own work record, or if you are a widow or widower getting benefits on a spouse's record, there is a five month waiting period and your payments will not begin until the sixth full month of disability. The 5-month waiting period does not apply to individuals filing as children of workers. Under SSI, disability payments may begin as early as the first full month after the individual applied or became eligible for SSI.
If the sixth month has passed, your first payment may include some back benefits. Your check should arrive on the third day of every month. If the third falls on a Saturday, Sunday, or legal holiday, then you will receive your check on the last banking day before that day. The check you receive is the benefit for the previous month.
Example: The check you receive dated July 3 is for June. Your benefit can either be mailed to you or be deposited directly into your bank account.
Some people who get Social Security have to pay taxes on their benefits. The rules are the same regardless as to whether Social Security benefits are received due to retirement or disability. If you file a federal tax return as an "individual" and your combined income is more than $25,000, you have to pay taxes. Combined income is defined as your adjusted gross income + Nontaxable interest + ½ of your Social Security benefits. If you file a joint return, you may have to pay taxes if you and your spouse have a combined income that is more than $32,000. If you are married and file a separate return, you will probably pay taxes on your benefits. Social Security has no authority to withhold state or local taxes from your benefit. Many states and local authorities do not tax Social Security benefits. However, you should contact your state or local taxing authority for more information.
Your disability benefits generally continue for as long as your impairment has not medically improved and you cannot work. They will not necessarily continue indefinitely, however.
Because of advances in medical science and rehabilitation techniques, an increasing number of people with disabilities recover from serious accidents and illnesses. Also, many individuals, through determination and effort, overcome serious conditions and return to work in spite of them.
If you are still getting disability benefits when you reach retirement age, your benefits will be automatically changed to retirement benefits, generally in the same amount. You will then receive a new booklet explaining your rights and responsibilities as a retired person.
If you are a disabled widow or widower, your benefits will be changed to regular widow or widower benefits (at the same rate) at 60, and you will receive a new instruction booklet that explains the rights and responsibilities for people who get survivors benefits.
If you disagree with SSA's decision, you can appeal it. You have 60 days to file a written appeal (either by mail or in person) with any Social Security office. Generally, there are four levels to the appeals process. They are:
- Reconsideration. Your claim is reviewed by someone who did not take part in the first decision.
- Hearing before an Administrative Law Judge. You can appear before a judge to present your case.
- Review by Appeals Council. If the Appeals Council decides your case should be reviewed, it will either decide your case or return it to the administrative law judge for further review.
- Federal District Court. If the Appeals Council decides not to review your case or if you disagree with its decision, you may file a civil lawsuit in a Federal District Court and continue your appeal all the way to the US Supreme Court if necessary.
If you disagree with the decision at one level, you have 60 days to appeal to the next level until you are satisfied with the decision or have completed the last level of appeal.
You have two special appeal rights when a decision is made that you are no longer disabled.
They are as follows:
- Disability Hearing. As part of the reconsideration process, this hearing allows you to meet face-to-face with the person who is reconsidering your case to explain why you feel you are still disabled. You can submit new evidence or information and can bring someone who knows about your disability. This special hearing does not replace your right to also have a formal hearing before an administrative law judge (the second appeal step) if your reconsideration is denied.
- Continuation of Benefits. While you are appealing your case, you can have your disability benefits and Medicare coverage (if you have it) continue until an administrative law judge makes his or her decision. However, you must request the continuation of your benefits during the first 10 days of the 60 days mentioned earlier. If your appeal is not successful, you may have to repay the benefits.
Retirement benefit calculations are based on your average earnings during a lifetime of work under the Social Security system. For most current and future retirees, The Social Security Administration (SSA) averages your 35 highest years of earnings. Years in which you have low earnings or no earnings may be counted to bring the total years of earnings up to 35.
You can collect early retirement benefits at age 62, but you currently can't get full benefits until 65 for persons born in 1937 or earlier. For persons born 1938 and later, the full retirement age increases gradually until it reaches 67 for those born in years 1960 and later. Then you can collect additional benefits for every year you delay your retirement until age 70. After you begin to collect Social Security benefits, you will continue to receive them for life.
You can create a my Social Security account with SSA and view your Social Security Statement online at any time.
With retirement on the horizon for scores of baby boomers, it's very likely that Social Security will be in your future; however, the Social Security trust fund will less and less able to pay benefit increases, which increase annually as the taxable wage base rises without some kind of reform.
Annuities
Variable annuity contracts are sold by insurance companies. Purchasers pay a premium of, for example, $10,000 for a single payment variable annuity or $50 a month for a periodic payment variable annuity. The insurance company deposits these premiums in an account that is invested in a portfolio of securities. The value of the portfolio goes up or down as the prices of its securities rise or fall.
After a specified period of time, which often coincides with the year the purchaser turns age 65, the assets are converted into annuity payments. Although the insurance company guarantees a minimum payment, these payments are variable, since they depend on the periodic performance of the underlying securities.
Almost all variable annuity contracts carry sales charges, administrative charges, and asset charges. The amounts differ from one contract to another and from one insurance company to another.
Fixed annuity contracts are not considered securities and are not regulated by the SEC (Securities and Exchange Commission).
An annuity, in essence, is insurance against "living too long." In contrast, traditional life insurance guards against "dying too soon." Briefly, here is how annuities function: An investor hands over funds to an insurance company. The insurer invests the funds. At the end of the annuity's term, the insurer pays the investor his or her investment plus the earnings. The amount paid at maturity may be a lump sum or an annuity, which is a set of periodic payments that are guaranteed as to amount and payment period.
Earnings that occur during the term of the annuity are tax-deferred and an investor is not taxed until the amounts are paid out. Because of the tax deferral, your funds have the chance to grow more quickly than they would in a taxable investment.
There are two reasons to use an annuity as an investment vehicle:
- You want to save money for a long-range goal, and/or
- You want a guaranteed stream of income for a certain period of time.
Annuities lend themselves well to funding retirement, and, in certain cases, education costs.
One negative aspect of an annuity is that you cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10 percent premature withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2, and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers' penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.
These penalties lead to a de facto restriction on the use of annuities as an investment. It really only makes sense to put your money in an annuity if you can leave it there for at least ten years, and only when the withdrawals are scheduled to occur after age 59-1/2. This is why annuities work well mostly for retirement needs, or for education funding in cases where the depositor will be at least 59-1/2 when withdrawals begin.
Annuities can also be effective in funding education costs where the annuity is held in the child's name under the provisions of the Uniform Gifts to Minors Act. The child would then pay tax on the earnings when the time came for withdrawals. A major drawback to this planning technique is that the child is free to use the money for any purpose, not just education costs.
If an investment adviser recommends a tax-deferred variable annuity, should you invest it? Or would a regular taxable investment be better?
Generally, you should be aware that tax-deferred annuities very often yield less than regular investments. They have higher expenses than regular investments, and these expenses eat into your returns. On the plus side, the annuity provides a death benefit. You should also be aware that there may be a commission on the product an investment adviser may be entitled to a commission on the product he or she is recommending.
At first glance, the immediate annuity would seem to make sense for retirees with lump-sum distributions from retirement plans. After all, an initial lump-sum premium can be converted into a series of monthly, quarterly or yearly payments, representing a portion of principal plus interest, and guaranteed to last for life. The portion of the periodic payout that is a return of principal is excluded from taxable income.
However, there are risks. For one thing, when you lock yourself into a lifetime of level payments, you aren't guarding against inflation. You are also gambling that you will live long enough to get your money back. Thus, if you buy a $150,000 annuity and die after collecting only $60,000, the insurer often gets to keep the rest. Unlike other investments, the balance doesn't go to your heirs. Furthermore, since the interest rate is fixed by the insurer when you buy it, you are locking into today's low rates.
You can hedge your bets by opting for what's called a "certain period," which, in the event of your death, guarantees payment for some years to your beneficiaries. There are also "joint-and-survivor" options, which pay your spouse for the remainder of his or her life after you die, or a "refund" feature, in which a portion of the remaining principal is resumed to your beneficiaries.
Some plans offer quasi-inflation adjusted payments. One company offers a guaranteed increase in payments of 10 percent at three-year intervals for the first 15 years. Payments are then subject to an annual cost-of-living adjustment, with a 3 percent maximum. However, for these enhancements to apply, you will have to settle for much lower monthly payments than the simple version.
A few companies have introduced immediate annuities that offer potentially higher returns in return for some market risk. These "variable, immediate annuities" convert an initial premium into a lifetime income; however, they tie the monthly payments to the returns on a basket of mutual funds.
If you want a comfortable retirement income, your best bet is a balanced portfolio of mutual funds. If you want to guarantee that you will not outlive your money, you can plan your withdrawals over a longer time horizon.
While traditional life insurance guards against "dying too soon," an annuity, in essence, can be used as insurance against "living too long." With an annuity, you will receive in return a series of periodic payments that are guaranteed as to amount and payment period. Thus, if you choose to take the annuity payments over your lifetime (there are many other options), you will have a guaranteed source of "income" until your death.
If you "die too soon" (that is, you don't outlive your life expectancy), you will get back from the insurer far less than you paid in. On the other hand, if you "live too long" and outlive your life expectancy you may get back far more than the cost of your annuity--along with the resultant earnings. By comparison, if you put your funds into a traditional investment, you may run out of funds before your death.
You cannot get to your money during the growth period without incurring taxes and penalties. The tax code imposes a 10 percent premature-withdrawal penalty on money taken out of a tax-deferred annuity before age 59-1/2 and insurers impose penalties on withdrawals made before the term of the annuity is up. The insurers' penalties are termed "surrender charges," and they usually apply for the first seven years of the annuity contract.
You can purchase a single-premium annuity, in which the investment is made all at once (perhaps using a lump sum from a retirement plan payout).
With the flexible-premium annuity, the annuity is funded with a series of payments. The first payment can be quite small.
The immediate annuity starts payments right after the annuity is funded. It is usually funded with a single premium, and is usually purchased by retirees with funds they have accumulated for retirement.
With a deferred annuity, payouts begin many years after the annuity contract is issued. Deferred annuities are used as long-term investment vehicles by retirees and non-retirees alike. They are used in tax-deferred retirement plans and as individual tax-sheltered annuity investments, and may be funded with a single or flexible premium.
With a fixed annuity contract, the insurance company puts your funds into conservative, fixed income investments such as bonds. Your principal is guaranteed, and the insurance company gives you an interest rate that is guaranteed for a certain minimum period--from a month to a year, or more. A fixed annuity contract is similar to a CD or a money market fund, depending on length of the period during which interest is guaranteed, and is considered a low risk investment vehicle.
This guaranteed interest rate is adjusted upwards or downwards at the end of the guarantee period.
All fixed annuities also guarantee you a certain minimum rate of interest of 3 to 5 percent for the entirety of the contract.
The fixed annuity is a good annuity choice for investors with a low risk tolerance and a short-term investing time horizon. The growth that will occur will be relatively low. In times of falling interest rates, fixed annuity investors benefit, while in times of rising interest rates they do not.
The variable annuity, which is considered to carry with it higher risks than the fixed annuity (about the same risk level as a mutual fund investment) gives you the ability to choose how to allocate your money among several different managed funds. There are usually three types of funds: stocks, bonds, and cash-equivalents. Unlike the fixed annuity, there are no guarantees of principal or interest. However, the variable annuity does benefit from tax deferral on the earnings.
You can switch your allocations from time to time for a small fee or sometimes for free.
The variable annuity is a good annuity choice for investors with a moderate to high risk tolerance and a long-term investing time horizon.
Tip: Today, insurers make available annuities that combine both fixed and variable features.
When it's time to begin taking withdrawals from your deferred annuity, you have several choices. Most people choose a monthly annuity-type payment, although a lump sum withdrawal is also possible. The size of your monthly payment depends on several factors including:
- The size of the amount in your annuity contract
- Whether there are minimum required payments
- The annuitant's life expectancy
- Whether payments continue after the annuitant's death
Summaries of the most common forms of payment (settlement options) are listed below. Keep in mind that once you have chosen a payment option, you cannot change your mind.
Fixed Amount gives you a fixed monthly amount (chosen by you) that continues until your annuity is used up. The risk of using this option is that you may live longer than your money lasts. If you die before your annuity is exhausted, your beneficiary gets the rest.
Fixed Period pays you a fixed amount over the time period you choose. For example, you might choose to have the annuity paid out over ten years. If you are seeking retirement income before some other benefits start, this may be a good option. If you die before the period is up, your beneficiary gets the remaining amount.
Lifetime or Straight Life payments continue until you die. There are no payments to survivors. The life annuity gives you the highest monthly benefit of the options listed here. The risk is that you will die early, thus leaving the insurance company with some of your funds.
Life with Period Certain gives you payments as long as you live (as does the life annuity) but with a minimum period during which you or your beneficiary will receive payments, even if you die earlier than expected. The longer the guarantee period is, the lower the monthly benefit will be.
Installment-Refund pays you as long as you live and guarantees that, should you die early, whatever is left of your original investment will be paid to a beneficiary.
Joint and Survivor. In one joint and survivor option, monthly payments are made during the annuitants' joint lives, with the same or a lesser amount paid to whoever is the survivor. In the option typically used for retired employees, monthly payments are made to the retired employee, with the same or a lesser amount to the employee's surviving spouse or other beneficiary. In this case, the spouse's (or other co-annuitant's) death before the employee won't affect what the survivor employee collects. The amount of the monthly payments depends on the annuitants' ages and whether the survivor's payment is to be 100 percent of the joint amount or some lesser percentage.
A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (Simplified Employee Pension), or some other retirement plan.
- Any nondeductible or after-tax amount you put into the plan is not subject to income tax when withdrawn
- The earnings on your investment are not taxed until withdrawal.
If you withdraw money before the age of 59-1/2, you may have to pay a 10 percent penalty on the amount withdrawn in addition to the regular income tax. One of the exceptions to the 10 percent penalty is for taking the annuity out in equal periodic payments over the rest of your life.
Once you reach age 70-1/2, you will have to start taking withdrawals in certain minimum amounts specified by the tax law (with exceptions for Roth IRAs and for employees still working after age 70-1/2).
Though this is sometimes done, no tax advantage is gained by putting annuities in such a plan since qualified plans and IRAs as well as annuities are tax-deferred. It might be better, depending on your situation, to put other investments such as mutual funds in IRAs and qualified retirement plans, and hold annuities in your individual account.
Payouts are taxed differently for qualified and non-qualified plans. These differences are summarized below.
Qualified and Non-Qualified Annuities
A tax-qualified annuity is one used to fund a qualified retirement plan, such as an IRA, Keogh plan, 401(k) plan, SEP (Simplified Employee Pension), or some other retirement plan. The tax-qualified annuity, when used as a retirement savings vehicle, is entitled to all of the tax benefits-and penalties--that Congress saw fit to attach to such plans.
The tax benefits are:
- The amount you put into the plan is not subject to income tax, and/or
- The earnings on your investment are not taxed until withdrawal.
A non-qualified annuity, on the other hand, is purchased with after-tax dollars. You still get the benefit of tax deferral on the earnings.
Tax Rules for Qualified Annuities
When you withdraw money from a qualified plan annuity that was funded with pre-tax dollars, you must pay income tax on the entire amount withdrawn.
Once you reach age 70-1/2, you will have to start taking withdrawals, in certain minimum amounts specified by the tax law.
Tax Rules for Non-Qualified Annuities
With a non-qualified plan annuity that was funded with after-tax dollars, you pay tax only on the part of the withdrawal that represents earnings on your original investment.
If you make a withdrawal before the age of 59-1/2, you will pay the 10 percent penalty only on the portion of the withdrawal that represents earnings.
With a non-qualified annuity, you are not subject to the minimum distribution rules that apply to qualified plans after you reach age 70-1/2.
Taxes may apply to your beneficiary (the person you designate to take further payments) or your heirs (your estate or those who take through the estate if you didn't designate a beneficiary).
Income tax. Annuity payments collected by your beneficiaries or heirs are subject to tax on the same principles that would apply to payments collected by you.
Exception: There's no 10 percent penalty on withdrawal under age 59-1/2 regardless of the recipient's age, or your age at death.
Estate tax. The present value at your death of the remaining annuity payments is an asset of your estate and subject to estate tax with other estate assets. Annuities passing to your surviving spouse or to charity would escape this tax.
Check Out The Insurer. Make sure that the insurance company offering it is financially sound. Annuity investments are not federally guaranteed, so the soundness of the insurance company is the only assurance you can rely on. Several services rate insurance companies.
Compare Contracts. For immediate annuities: Compare the settlement options. For each $1,000 invested, how much of a monthly payout will you get? Consider the interest rate and any penalties and charges.
Deferred annuities. Compare the rate, the length of guarantee period, and a five-year history of rates paid on the contract, not just the interest rates.
Variable annuities. Check out the past performance of the funds involved.
If a particular fund has a great track record, ascertain whether the same management is still in place. Although past performance is no guarantee, consistent management will grant you better odds.
There are costs associated with annuities. Here are the most important items you should be aware of:
Sales Commission. Ask for details on any commissions you will be paying. What percentage is the commission? Is the commission deducted as a front-end load? If so, your investment is directly reduced by the amount of the commission. A no-load annuity contract, or at least a low-load contract, is the best choice.
Surrender Penalties. Find out the surrender charges (that is, the amounts charged for early withdrawals). The typical charge is 7 percent for first-year withdrawals, 6 percent for the second year, and so on, with no charges after the seventh year.
Tip: Be sure the surrender charge "clock" starts running with the date your contract begins, not with each new investment.
Other Fees and Costs. Ask about all other fees. With variable annuities, the fees must be disclosed in the prospectus. Fees lower your return, so it is important to know about them. Fees might include:
- Mortality fees of 1 to 1.35 percent of your account (protection for the insurer in case you live a long time)
- Maintenance fees of $20 to $30 per year
- Investment advisory fees of 0.3 percent to 1 percent of the assets in the annuity's portfolios
Other Considerations. Some annuity contracts offer "bail-out" provisions that allow you to cash in the annuity if interest rates fall below a stated amount without paying surrender charges.
There may also be a "persistency" bonus which rewards annuitants who keep their annuities for a certain minimum length of time.
As in so many areas of retirement planning, that depends upon your particular needs and circumstances.
- An annuity preserves the tax shelter for funds not yet paid out as annuity income, continuing to grow tax-free to fund future payouts.
- A lump sum withdrawal may be preferable for those in questionable health.
- Consider an annuity with a "refund feature" that guarantees a fixed sum to your heirs should you die earlier than expected.
A joint and survivor annuity pays a certain annuity during your life and half that amount (it could be more) to your surviving spouse for life.
In almost all cases, the annual amount you will get under a joint and survivor annuity will be less than you would get under an annuity on your life alone.
Joint and survivor annuities are almost always required in pension plans, and sometimes in other plans. But you and your spouse can still agree to some other form.
Chief reasons for such agreement are so that your child or other family member can share in the income, or to take a lump sum distribution, or to take a larger annual amount over the participant's life alone.
Trusts
There are many forms of personal trusts. To begin with, a personal trust can be Revocable (assets can be transferred freely in and out) or Irrevocable (where a transfer of assets into the trust is generally permanent). It can be a living trust (set up and funded while you are living) or a testamentary trust (funded through your estate).
The trust may need to file a tax return & pay taxes on net income or be a Grantor Trust and report it's net income on your personal income tax return. Trusts come in many types and fulfill many different needs. We can help you determine what type of trust you might need or make sense of one that you "inherited".
A Qualified Personal Residence Trust (QPRT) is a special type of trust approved by the IRS that allows you to give your home away, but still live in it. It is used to give away your home (usually to your children) at a date in the future. The gift value is determined by the fair market value of your home, but at a future date (for example 7 years in the future) which reduces the value of the gift you are making today.
With a QPRT you have gifted your home to someone, but retained the right to live in it for a determined number of years. At the end of that time, the home may be distributed to the recipient or retained in trust for them. You may even rent the home from their trust once the transfer has occurred. However, if you die before the predetermined number of years to the gift transfer occurs, then the home is still in your estate as the gift did not come to fruition.
If you are interested in setting up a QPRT for your primary residence or vacation home, we can help you look at the various options that are available.
QTIP means Qualifying Terminal Interest Property. A QTIP Trust is elected on an estate tax return and the net value of the property it receives from the estate is eligible for the unlimited marital deduction. A QTIP Trust must meet 4 requirements:
- All of the trust Accounting Income must be payable to the surviving spouse at least annually for their lifetime;
- No assets may be distributed to anyone other than the surviving spouse during their lifetime,
- Other than residential property and tangible property used by the surviving spouse, all property must be either productive of income or be subject to a trust document clause that requires or permits the spouse to direct the trustee to make it productive, and
- The executor of the decedent's estate must make the election on an estate tax return for all or part of the trust property to qualify for the marital deduction.
We can help you understand, design, implement and manage a QTIP Trust. Contact us today for assistance.
A charitable trust is an irrevocable trust which is not tax exempt. All remaining interests of the Trust are committed to one or more charitable purposes. When the Trust is formed, a charitable deduction is allowed under the Internal Revenue Code. Unless the Trust qualifies as a Public Charity, it is subject to the same rules and taxes as a Private Foundation. If you are wondering whether this form of organization meets your goals and objectives, we would be glad to discuss the options with you. Contact us today to see how we can help.
An irrevocable life insurance trust (ILIT) is an irrevocable trust set up to own life insurance policies, holding them outside of your estate in order to reduce estate taxes and allowing the grantor of the trust more options for control including distribution of the proceeds. An ILIT is often a grantor trust and can be used to leverage your lifetime gift exclusion. We can help you determine if setting up and funding an ILIT would be beneficial to you and your heirs. Contact us today to see how we can help.
An intentionally defective grantor trust is an irrevocable trust that is used to move assets out of your estate through gifts and sales while "defective" for income tax purposes. In other words the income produced by the assets it holds is still considered to belong to the grantor and reported on their individual income tax return.
In this way, an estate can be reduced further than by the original gift as taxes are paid on the income produced by them in future years, further reducing the estate of the grantor while the payment of those taxes is not considered an additional gift. An IDGT also allows a sale from the grantor to the trust, once sufficiently funded, to be not reported on an income tax return as the seller and the buyer are the same person due to the defective status of the trust.
We can help you determine if a trust of this type would be beneficial in your estate planning. If you need help in this regard, contact us.
Estate/Succession Planning
Estate planning is the process of making personal and legal arrangements during a person's lifetime so that the anticipated transition of their assets, investments, business and personal concerns is accomplished in a manner that fulfills the individual's goals, minimizes taxes, and reduces the workload and difficulty for their heirs. We work with you to listen to your concerns & priorities and help you design and implement a plan that is most suitable for your needs.
Succession planning is a vital step for the owner of a family business to plan for the future time when they desire or need to transition the business ownership and leadership to the next generation. Estate planning implements the desired results through legal documents using a variety of tools such as gifting and tax planning often involving trusts such as an Intentionally Defective Grantor Trust (IDGT).
Successful estate planning will minimize estate & probate taxes allowing for the most effective use of lifetime exemptions. There are also many non-tax, non-financial implications involved in succession planning. We would be glad to discuss the available options and help you evaluate the best course of action for your needs.
A good transition plan will define the changes taking place and inform employees on what they need to do to ensure the changes take place effectively without disrupting the everyday workings of the business.
The first step is to define what the changes are that are taking place. Next, you will need to identify the logistics of the transaction and the resources that are necessary to complete the transition. Once this is done, you will be in a position to discuss the financial impact of the transition with your advisor. Contact us if you would like help through this process.
The answer to this question depends on how those business assets are currently being held. Are they held by you individually, in a business or a trust? Regardless of how they're held, we can assist you in determining the most tax efficient way to transfer those assets. Contact us to see how we can help.
Estate planning can impact a charitable foundation in many ways. You can set up and fund a charitable foundation in your will or trust to be funded upon your passing. A charitable foundation that is in existence may benefit from estate planning by it's founder or interested donors who direct that some estate assets be used to provide additional funding.
Other planning may be needed if upon your passing the surviving board members and family members are either unable or not interested in spending the time it takes to manage your foundation. We can help you look at the various alternatives and make plans that are appropriate for your desires and situation.
A written family limited partnership (FLP) agreement must be prepared, preferably by an attorney. After the agreement is executed, assets may be transferred, such as real estate, corporate stock, or cash. However, care should be taken when creating the FLP and in operating the FLP as a family business. Be sure to understand state laws and the rights and obligations associated with transferred property. If you need help in this regard, contact us.
Our specialists are all seasoned professionals who have years of experience working within your industry. Reach out to us today to schedule a consultation.
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