Planning

The CARES Act and your Savings Plan

The CARES Act and Your Retirement Savings

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Think Twice Before Tapping into Your Retirement Savings

New legislation — the CARES Act — permits qualified individuals to take early distributions from their retirement assets, such as their 401(k) or individual retirement account (IRA) — penalty free. The rules – which sunset after 2020 – are designed to help the many cash-strapped Americans who have suffered financially as a result of the coronavirus epidemic. But tapping into your retirement savings has its costs, and there may be better ways to shore up your short-term cash flow.

The CARES Act

The Act permits qualified individuals to take distributions of up to $100,000 from their IRA or workplace retirement savings plan (if allowed by the plan) without incurring the 10% additional tax on early distributions that would otherwise generally apply to distributions made prior to age 59½. Amounts withdrawn may be repaid within three years, if desired. Note, however, that ordinary income taxes apply to all pretax funds withdrawn, although taxpayers may elect to report the income over three tax years instead of one.

These coronavirus-related distributions may only be made to a “qualified individual” on or after January 1, 2020, and before December 31, 2020. A qualified individual includes anyone who has been diagnosed with the SARS-CoV-2 virus or with coronavirus disease 2019 (COVID-19) by a test approved by the Centers for Disease Control and Prevention, or whose spouse or dependent has been diagnosed. It also includes individuals who experience adverse financial consequences as a result of: being quarantined, furloughed, laid off, or having work hours reduced due to SARS-CoV-2 or COVID-19; being unable to work on account of a lack of childcare due to the virus or disease; closing or reducing hours of a business owned or operated by the individual due to the virus or disease; or other factors as determined by the Treasury Secretary.

The Act also relaxes rules on borrowing from a retirement plan account. If authorized by the plan, qualified individuals may borrow as much as $100,000 or 100% of their vested account balance. These limits are effective from March 27, 2020 to September 22, 2020.

Additionally, qualified individuals with an outstanding loan (on or after March 27, 2020) may delay loan repayments due during the period from March 27, 2020 to December 31, 2020 for up to one year.

Consider the Costs

Withdrawing or borrowing money from your retirement account may seem like an easy way to shore up your short-term cash flow, but there are long-term costs to consider. Most notably, if you withdraw funds and don’t repay them, you’ll be reducing your retirement nest egg, perhaps significantly. And making up for withdrawn balances means contributing more — potentially much more — down the road. That’s because time is a critical ally when saving for retirement. The more time your contributions and earnings have to grow, the better the chance you will be able to reach your retirement savings goals.

If you don’t withdraw the funds altogether, but just borrow them from your plan, you must generally pay back the loan within five years, or earlier if you lose your job or leave your employer voluntarily before the loan is paid back. Otherwise, it will be considered a taxable distribution, requiring you to pay income tax on the amount of the loan. What’s more, current law protects funds held in a qualified plan from creditors in the event of a bankruptcy. So if you are experiencing extreme financial difficulty, keeping funds in your qualified plan may be one way to limit the damage. Even if you’re allowed to defer some loan payments because of the CARES Act, you’ll want to weigh the potential downsides before borrowing.

There May be Better Alternatives

As any financial professional will attest, borrowing from your future to fund today’s temporarily negative cash flow is generally not a good strategy. Instead, consider other sources of funds such as:

  • Short-term loans
  • Tapping into a home equity line of credit
  • Borrowing from friends or relatives

You also may want to consider ways to reduce current costs until your cash flow improves.

  • Reduce credit card payments by consolidating balances on a low-rate card
  • Contact current lenders to arrange for a temporary payment freeze
  • Cut back on discretionary expenses and make a budget

Also keep in mind that the provisions of the CARES Act are temporary. So if the economic fallout from the coronavirus epidemic has left you strapped for cash, try to maintain a long-term focus and stick to your plan.

                                                                                                                                                                            

 

This material was prepared by LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.

Managing your finances during COVID

Managing Finances during COVID19

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Smart Financial Strategies for Unexpected Events

A once-in-a-lifetime event such as the coronavirus pandemic forces us to reassess many things we may have taken for granted. Most of us take our personal good health for granted. Many of us assume we will always get by financially, that we will always be able to earn money in some way, and that, in a worst-case-scenario, the government will be there to step in and help.

But assumptions are always there to be challenged. And adverse situations always should teach us some lessons. What lessons can we take away from the current crisis that will help us better prepare for an event that appears suddenly and upends many of our day-to-day activities? Specifically, what steps should we take to ensure that we will have enough money set aside to see us through another crisis? What can we do going forward so that we will be able to pay our bills and handle unforeseen expenses if we lose our jobs? Why is it a good idea to limit our debt burden, and how can we achieve this goal?

Here are some ideas that could jump-start your thinking.

Spend Less Than You Earn

It’s easier said than done. But it is one of the most effective ways of building up your savings and your personal wealth. You may have to reevaluate what you consider important — especially if shopping has always been enjoyable for you. You can still shop, just not as often and only for items that you or your family members truly need.

Set yourself a goal of setting a percentage of your pay aside for savings. If need be, start small so you don’t get discouraged. Then, increase the percentage you save after a few months.

Look for Ways to Boost Savings

Now that you have decided to spend less than you earn, you can start to look seriously at ways to increase your savings. For example, you may be able to find some extra cash by shopping around for better rates on your utilities, cell phone service, and auto or home insurance. If your credit score is good, you may be able to find a credit card with a lower interest rate than you currently pay. And, if you can afford the closing costs, refinancing your mortgage could potentially unlock some solid savings.

If you do not have a budget, now is the time to create one. A budget can help most people organize and control their spending. If you track your spending for a few months, you can use that information to cut back on impulse buying and spending on nonessential items and redirect that money to savings and investments.

Be sure to direct some of that money to your own emergency fund. An emergency fund should be used to pay for unexpected, large expenses so you don’t have to borrow the money. Financial experts say that, ideally, your emergency fund should be able to cover six months of living expenses — including mortgage and auto payments. It sounds like a lot to save, but you may be surprised how much you can save when you focus on that goal.

Take Control of Your Debt

Debt is like savings in reverse. When you are in debt, you keep paying interest on goods and services that you probably consumed two or three years ago. If you carry consumer debt, now is the time to get a handle on that situation. You are not in a good place if:

  • Your credit card balance is growing
  • You are paying only a minimum on your bills
  • You are missing payments or paying late.

For every loan and credit card you carry, find out how much you owe, the interest rate, and the payment schedule. You can use this information to figure how much money you can afford to put toward paying down your debt and how long it will take. These strategies can help:

  • Pay off the card with the highest interest rate first;
  • Transfer your balance to a card with a lower interest rate; and/or
  • Pay more than the minimum amount. Paying more than the minimum is critically important since the less you pay, the greater the interest will be and the longer it will take to pay off your balance.

Every few months, check your expenses to see if you can find other funds to use to reduce your debt. If possible, consider part-time work and use what you earn to pay off your debts. In the meantime, do not take on additional debt. Try using cash (or your debit card) instead of credit for as many transactions as possible.

Protect Your Earning Power

If you are a working parent, your family’s financial well-being is tied closely to your ability to make a living. If you were to have an accident or fall ill, your disability could destabilize your finances. If you do not have a private disability income insurance policy, consider getting one. The payments from the policy would help pay for critical everyday expenses when your disability prevents you from working and collecting a salary. Before you purchase insurance, though, make sure you understand the policy’s definition of disability and all the other policy terms.

 

You also may want to name someone you trust to make financial and health care decisions if you become unable to make them for yourself. Talk to your attorney to learn more about the options available in your state. And you might consider setting up a living trust that allows the trustee of the trust to handle your financial affairs if you cannot.

Review Your Investing Strategy

Finally, remember that risk is a given in investing. Some investments carry a higher risk of loss than others. However, riskier investments typically offer higher potential returns than more conservative alternatives. When you invest you have to decide how much investment risk you can comfortably handle while seeking higher returns, and choose your investments accordingly. It helps to review your investing approach and your tolerance for possible investment losses at least once a year.

Facing the Future

Every crisis is different. However, those who think ahead and have some strategies in place to deal with the financial aspects of a crisis are potentially more likely to do better than those who do not plan.

 

This material was prepared by LPL Financial.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual security. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.

The cost and availability of Life Insurance depend on many factors such as age, health, and amount of insurance purchased. In addition to premiums, there are contract limitations, fees, exclusions, reductions of benefits, and charges associated with policy. And if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Any guarantees are contingent upon the claims-paying ability of the issuing company.

Should I refinance my mortgage?

Should You Refinance?

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When do I take my pension?

Deciding When to Start Taking a Pension

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Deciding When to Start Taking a Pension

Most businesses today do not offer a pension plan. But pensions are still a common benefit for teachers, federal employees, and others who work in the public sector. Many grandfathered private-sector plans also still exist. In fact, according to the Bureau of Labor Statistics, over 30 million public and private sector American workers participate in a pension plan.1

For those fortunate enough to have a workplace pension, one of the critical decisions you’ll need to make is when to begin collecting. Although payments typically begin at age 65, many plans allow you to start collecting your retirement benefits as early as age 55. But if you decide to start receiving benefits before you reach full retirement age, the size of your monthly payout will be less than it would have been if you’d waited. So the question is: when is the optimal time to start, so that you maximize your total payments?

Unfortunately, there is no simple answer. What works best for you will depend upon a number of different factors. Here are some points you’ll want to consider before deciding.

Longevity. The longer you live, the better off you will be by delaying your pension payments. Although nobody can pinpoint exactly how long they will survive, they may be able to make a guesstimate. Today’s newborns have an average life expectancy of close to 79 years. A man who reaches age 65 has a life expectancy of about 83; a woman, about 86. Those in good health with a family history of longevity stand a good chance of exceeding these figures. What’s more, medical advances have helped increase these averages over time. As a result, many people today can look forward to retirements of 30 years or longer.

Specific terms of the pension plan. The terms of a pension vary widely from plan to plan. A typical pension plan’s payout depends on years of service. So your timing may depend on when you hit a threshold year. Other factors affect payout, such as whether overtime and bonuses count toward your payout or if benefits are capped at a certain percentage of salary. Many plans also offer cost-of-living adjustments (COLAs). So make sure to check the terms of your specific plan.

Is the pension safe? Although there are federal and state laws that seek to ensure that a given pension plan meets all its payment obligations, there is no guarantee that that will be the case. Pension plan defaults have been rare, but no pension plan is bulletproof. If a local government entity or private corporation falls on hard times, it could affect pension payouts. It’s no secret that many large public plans are underfunded. Some estimates put the collective shortfall in the trillions. Whether such underfunding will eventually reduce benefits in a particular plan is anyone’s guess. But the upshot for prospective pensioners is that it may not be wise to pin all your retirement hopes on one pension plan.

Personal circumstances. Everyone has individual needs and financial situations. You may have other sources of retirement income — Social Security, an individual retirement account (IRA), a 401(k) plan, or other retirement savings. You may also plan to cash in on a home or other real estate to help fund your retirement. Or, you may have a spouse with his or her own pension plan. Whatever your circumstances, be sure to factor them into your decision.

Compare Cumulative Payouts2

The following chart shows the cumulative payments of a hypothetical pension plan, for early (age 60), full (age 65), and late (age 70) start times. It assumes a pension of $3,000 per month or $36,000 per year at full retirement age; that payments are fixed, with no COLA increases; and that the pension decreases 5% for each year of early retirement and increases 5% for each year of late retirement (until age 70).

Deciding When to Start Taking a Pension

Note where the lines cross each other. An early start will result in the highest cumulative benefit until you hit age 80. After that point, “full” timing begins to net a higher cumulative payout. And if you opt to wait until age 70, your cumulative benefit won’t outpace a full benefit until you reach age 90.

Keep in mind that this example is for illustration purposes and may differ from your actual experience. Talk with a financial advisor who can help you decide when is the best time to start taking your pension payouts.

Notes

1Bureau of Labor Statistics, National Compensation Survey for 2018.
2Illustration is hypothetical. Your plan will differ.

Lowering your taxes with year end planning

Lower Your Tax Bill with Year-End Planning

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Tips to Help Lower Your Tax Bill with Year-End Planning

As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than before year-end. That’s because there are a number of tax-smart strategies you can implement now that may reduce your tax bill come April 15 or in the years ahead.

Consider how the following strategies might help to lower your taxes.

Put Losses to Work

If you have capital gains, IRS rules allow you to offset your gains with capital losses. Short-term gains (on assets held one year or less) are reduced by short-term losses, and long-term gains (on assets held longer than a year) are reduced by long-term losses. If your net long-term capital gain is more than your net short-term capital loss, the net capital gain generally is taxed at a top rate of 20%.1 A net short-term capital gain, on the other hand, is taxed at ordinary rates, which range as high as 37%. To the extent that losses exceed gains, you can deduct up to $3,000 in capital losses against ordinary income on that year’s tax return and carry forward any unused losses for future years.

Given these rules, there are several actions you should consider:

  • Avoid short-term capital gains when possible, as these are taxed at higher ordinary rates. Unless you have short-term capital losses to offset them, consider holding the assets until you’ve met the long-term holding period (generally, more than one year).
  • Take a good look at your portfolio before year-end and estimate your gains and losses. Some investments, such as mutual funds, incur trading gains or losses that must be reported on your tax return and are difficult to predict. But most capital gains and losses will be triggered by the sale of the asset, which you usually control. Are there some winners that have enjoyed a run and are ripe for selling? Are there losers you would be better off liquidating? The important point is to cover as many of the gains with losses as you can, thereby minimizing your capital gains tax.
  • Consider taking capital losses before capital gains, since unused losses may be carried forward for use in future years, while gains must be taken in the year they are realized.

When determining whether or not to sell a given investment, keep in mind that a few down periods don’t mean you should sell simply to realize a loss. Stocks in particular are long-term investments, subject to ups and downs. Likewise, a healthy unrealized gain does not necessarily mean an investment is ripe for selling. Remember that past performance is no indication of future results; it is expectations
for future performance that count. Moreover, taxes should be only one consideration in any decision to sell or hold an investment.

IRAs: Contribute, Distribute, or Convert

One simple way of reducing your taxes is to contribute to a traditional IRA, if you are eligible for tax-deductible contributions. Contribution limits for the 2019 tax year — which may be made until April 15, 2020 — are $6,000 per individual and $7,000 for those aged 50 or older. Note that deductibility phases out above certain income levels, depending upon your filing status and whether you (or your spouse) are covered by an employer-sponsored retirement plan.

An important year-end consideration for older IRA holders is whether or not they have taken required minimum distributions. The IRS requires account holders aged 70½ or older to withdraw specified amounts from their traditional IRA each year. These amounts vary depending on your age. If you have not taken the required distributions in a given year, the IRS will impose a 50% tax on the shortfall. So make sure you take the required minimums for the year.

Another consideration for traditional IRA holders is whether to convert to a Roth IRA. If you expect your tax rate to increase in the future — either because of rising earnings or a change in tax laws — converting to a Roth may make sense, especially if you are still a ways from retirement. You will have to pay taxes on any pretax contributions and earnings in your traditional IRA for the year you convert, but withdrawals from a Roth IRA are tax free and penalty free as long as you’re at least 59½ and at least five years have passed since you first opened a Roth IRA. If you have a nondeductible traditional IRA (i.e., your contributions did not qualify for a tax deduction because your income was not within the parameters established by the IRS), investment earnings will be taxed but the amount of your contributions will not. The conversion will not trigger the 10% additional tax for early withdrawals.

These are just steps you can take today to help lighten your tax burden. Work with a financial professional and tax advisor to see what you can do now to reduce your tax bill.

1A 3.8% tax on net investment income may effectively increase the top rate on long-term capital gains to 23.8% for single taxpayers with a modified adjusted gross income (MAGI) of more than $200,000 and to those who are married and filing jointly with a MAGI of more than $250,000.

How will the SECURE Act affect my retirement?

The Secure Act and Your Retirement

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The Secure Act: Easier and More Flexible Ways to Save for Retirement

Americans are woefully unprepared for retirement. As survey after survey has shown, the average person is simply not
saving enough to provide for a comfortable retirement. That’s why Congress is currently proposing reforms to retirement
plan rules.

The House bill, dubbed the SECURE Act (Setting Every Community Up for Retirement Enhancement Act of 2019), and the
Senate bill named RESA (Retirement Enhancement Savings Act) contain a number of different provisions designed to make
plans more accessible and flexible for savers and easier for small businesses to form and administer.

Below is a summary of the legislation’s most significant changes and how they will help more Americans save more for
retirement.

Access for part-time employees. The new rules would permit most long-term, part-time workers to participate in their employer’s retirement plan if they have worked at least 500 hours per year for three consecutive years. Additionally, employers would not be required to make employer contributions for these participants.

Longer time to contribute. Although Roth individual retirement accounts (IRAs) have no contribution time limit, contributions to traditional IRAs are not permitted after you reach age 70½. The legislation would repeal this age limit so that people working past age 70½
could contribute to both types of IRAs if they wish.

Later required minimum distributions (RMDs). Currently, plan participants and traditional IRA owners are generally required to start
withdrawing a minimum amount from their retirement savings each year once they reach age 70½. The new rules would increase this
age to 72, allowing savers to enjoy tax-deferred compounding even longer.

Penalty-free withdrawals for birth or adoption of child. This change would allow plan participants to withdraw up to $5,000, penalty
free, from their plan accounts following the birth or adoption of a child. Withdrawn amounts could later be recontributed to the plan
tax free, subject to certain requirements.

Improved portability of lifetime income. For participants whose plan gives them a lifetime income investment option — typically an
annuity — the legislation gives them the ability to either keep the annuity or roll it into an IRA or other qualified plan in the event that
the annuity option is removed from the plan’s investment lineup. The annuity would not have to be liquidated and the guarantees
would be preserved, allowing greater portability.

No more “stretch” IRAs for non-spouse beneficiaries. Current rules allow most IRA beneficiaries to “stretch” RMDs from an inherited account over their own lifetimes. The proposed rules would continue this feature for spouses, but non-spouse beneficiaries
would need to take distributions within 10 years of the IRA owner’s death. There would be some exceptions to the general rule,
however, if the beneficiary is a minor, disabled, chronically ill, or not more than 10 years younger than the deceased IRA owner.

Multiple employer plans (MEPs). The legislation would allow employers to combine forces with other unrelated employers to form
a MEP. This provision is aimed specifically at small businesses that otherwise could not offer a 401(k) to their employees due to
their high administrative costs.

A number of additional provisions target small businesses, making it easier to start and administer a retirement plan. These include
tax credits and other changes intended to reduce the amount of paperwork and costs associated with creating and maintaining a
retirement plan.

The legislation still needs to clear several hurdles in Congress before it can be signed into law. But it has bipartisan support in the
House and Senate, and the president is expected to sign it once a final bill is agreed upon. So stay tuned. A more SECURE retirement may soon be in your future.

 

 

 

Sources:
https://www.congress.gov/bill/116th-congress/house-bill/1994/text
https://waysandmeans.house.gov/sites/democrats.waysandmeans.house.gov/files/documents/SECURE%20Act%20section%20by%20section.pdf
https://www.finance.senate.gov/imo/media/doc/RESA%20Summary%204.1.19-banner-converted.pdf
https://www.congress.gov/bill/116th-congress/house-bill/1007/text

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. This article was prepared by DST Systems Inc. This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

Getting prepared to retire

Retiring? Take Control of Your Assets

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Retiring? Take Control of Your Assets

After years of saving and investing, you can finally see the big day — retirement. But before kicking back, you still need to address a few matters. Decisions made now could make the difference between your money outlasting you or vice versa.

Calculating Your Retirement Needs

First, figure out how much income you may need. When retirement was years away, this exercise may have involved a lot of estimates. Now, you can be more accurate. Consider the following factors:

  • Your home base — Do you intend to remain in your current home? If so, when will your mortgage be paid? Will you sell your current home for one of lesser value, or “trade up”?
  • The length of your retirement — The average 65-year-old man can expect to live about 17 more years; the average 65-year-old woman, 20 more years, according to the National Center for Health Statistics. Have you accounted for a retirement of 20 or more years?
  • Earned income — The Bureau of Labor Statistics estimates that by 2022, 23% of people aged 65 or older will still be employed, almost twice the proportion that prevailed in 2002.1 If you continue to work, how much might you earn?
  • Your retirement lifestyle — Your lifestyle will help determine how much preretirement income you’ll need to support yourself. A typical guideline is 60% to 80%, but if you want to take luxury cruises or start a business, you may well need 100% or more.
  • Health care costs and insurance — Many retirees underestimate health care costs. Most Americans are not eligible for Medicare until age 65, but Medicare doesn’t cover everything. You can purchase Medigap supplemental health insurance to cover some of the extras, but even Medigap insurance does not pay for long-term custodial care, eyeglasses, hearing aids, dental care, private-duty nursing, or unlimited prescription drugs. For more on Medicare and health insurance, visit Medicare’s consumer website.
  • Inflation — Although the inflation rate can be relatively tame, it can also surge. It’s a good idea to tack on an additional 4% each year to help compensate for inflation.

Running the Numbers

The next step is to identify all of your potential income sources, including Social Security, pensions, and personal investments. Don’t overlook cash-value life insurance policies, income from trusts, real estate, and the equity in your home.

Also review your asset allocation — how you divide your portfolio among stocks, bonds, and cash. Are you tempted to convert all of your investments to low-risk securities? Such a move may place your assets at risk of losing purchasing power due to inflation. You may live in retirement for a long time, so try to keep your portfolio working for you — both now and in the future. A financial advisor can help you determine an appropriate asset allocation.

                            Robber Baron: Inflation

Here’s how a 4% inflation rate would erode $400,000 over a 25-year period. Because inflation slowly eats away at the purchasing power of a dollar, it’s important to factor inflation into your annual retirement expenses.
 Retiring? Take Control of Your Assets

 

  This example is hypothetical and for illustrative purposes only.

A New Phase of Financial Planning

Once you’ve assessed your needs and income sources, it’s time to look at cracking that nest egg you’ve built up. First, determine a prudent withdrawal rate. A common approach is to liquidate 5% of your principal each year of retirement; however, your income needs may differ.

Next, you’ll need to decide when to tap into tax-deferred and taxable investments. The advantage of holding on to tax-deferred investments (employer-sponsored retirement plan assets, IRAs, and annuities) is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.2 However, earnings and deductible contributions in tax-deferred accounts are subject to income tax upon withdrawal — a tax that can be as high as 39.6% at the federal level. In contrast, long-term capital gains from the sale of taxable investments are taxed at a maximum of 20%.3 The key to managing taxes is to determine the best strategy given your income needs and tax bracket.

Also, tax-deferred assets are generally subject to required minimum distributions (RMDs) — based on IRS life expectancy tables — after you reach age 70½. Failure to take the required distribution can result in a penalty equal to 50% of the required amount. Fortunately, guidelines do not apply to Roth IRAs or annuities.2 For more information on RMDs, see the IRS’s RMD resource page or call the IRS at 1-800-829-1040.

A Lifelong Strategy

A carefully crafted retirement strategy also takes into account your estate plan. A will is the most basic form of an estate plan, as it helps ensure that your assets get disbursed according to your wishes. Also, make sure that your beneficiary designations for retirement accounts and life insurance policies are up-to-date.

If estate taxes are a concern, you may want to consider strategies to help manage income while minimizing your estate tax obligation. For example, with a grantor retained annuity trust (GRAT), you move assets to an irrevocable trust and then receive an annual annuity for a specific number of years. At the end of that period, the remaining value in the GRAT passes to your beneficiary — usually your child — generally free of gift taxes. Another option might be a charitable remainder trust, which allows you and/or a designated beneficiary to receive income during life and a tax deduction at the same time. Ultimately, the assets pass free of estate taxes to a named charity.

It’s easy to become overwhelmed by all the financial decisions that you must make at retirement. The most important part of the process is to consult a qualified financial professional, a tax advisor, and an estate-planning attorney to make sure that you’re prepared for this new — and exciting — stage of your life.

                   How Much Can You Withdraw?

This chart can give you an idea how much you could potentially withdraw from your retirement savings each year. For example, if you begin with $400,000 in assets and expect an average annual return of 5% over a 25-year retirement, you could potentially withdraw $18,000 per year. Withdraw more than that each year and you may outlive your money. Also consider: This chart doesn’t take income taxes into account, which can range from 10% to 35%, depending on your tax bracket.
 Retiring? Take Control of Your Assets
Assumes 5% average annual return, and that withdrawal rate is adjusted for annual 4% inflation rate after the first year. This example is hypothetical and for illustrative purposes only. Investment returns cannot be guaranteed.

 

1Source: Labor Force Projections to 2022, Monthly Labor Review, U.S. Bureau of Labor Statistics.

2Withdrawals from tax-deferred accounts prior to age 59½ are taxable and may be subject to a 10% additional tax. Neither fixed nor variable annuities are insured by the Federal Deposit Insurance Corp., and they are not deposits of — or endorsed or guaranteed by — any bank. Withdrawals from annuities may result in surrender charges.

3A 3.8% tax on unearned income may also apply.

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

When should I take Social Security?

How Much Social Security Can You Expect?

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How Much Social Security Can You Expect?

One of the first steps in planning for retirement is to get an accurate read on just how much income you can expect to receive from Social Security. The exact amount of your Social Security benefit will depend upon your earnings history and retirement timing. Although Social Security provides only about a third of a typical retiree’s income, it often serves as the foundation for calculating how much other income you’ll need and how much you’ll need to save.

The best and most accurate estimate of your future Social Security benefits comes from the Social Security    Administration (SSA). If you are age 60 or older, you should be automatically sent an annual statement showing exactly how much you can expect when you retire. If you are under age 60, you can access current estimates through the SSA’s My Social Security site. You can also access SSA’s online calculators.

Here is a summary of the different ways you can get accurate estimates of your Social Security:

  • Social Security Statements are mailed annually to anyone age 60 or older who has paid into Social Security. The statements include an estimate of your monthly benefit at full retirement age, based on your earnings history. They also show your earnings history – a year-by-year breakdown of earnings on which benefits are based. You can also request a statement by creating a personal my Social Security account. Once it’s set up, you can easily access updates and view your earnings history. You can also request a statement at any time by calling 1-800-772-1213 or contacting your local SSA office.
  • Retirement Estimator gives estimates based on your actual Social Security earnings record. The calculator shows results for early (age 62), full (ages 65-67 depending upon your year of birth), and delayed (age 70) retirement. The Retirement Estimator also lets you create additional “what if” retirement scenarios based on current law.
  • Other SSA benefit calculators help you estimate your Social Security benefits if you do not have an earnings record with Social Security or cannot access it. The calculators will show your retirement benefits as well as disability and survivor benefit amounts if you should become disabled or die. A variety of calculators are available that address different circumstances.

 

A recent report by the SSA suggests that a lot of Americans are not taking advantage of the free statements available to anyone who has paid into Social Security. According to the report, only 43% of registered my Social Security users accessed their accounts online in 2018, down from 96% in 2012.1

 

How much also depends on when you start collecting

If you want, you can sign up for Social Security benefits at age 62. However, you’ll receive less than your full benefit — somewhere between 70% and 75% — depending on when you were born. What’s more, if you are still working and make more than the yearly earnings limit ($17,640 in 2019), your benefit will be reduced by one dollar for every two dollars earned beyond that limit.

Wait until full retirement age (from 66 to 67 for those born after 1942) and you’ll receive your full benefit and face no earnings penalty. Sign up for benefits beyond full retirement age and your benefit will increase 8% a year until you reach age 70.

When you decide to collect will depend in part on how much you can expect to receive. So make a point of checking out one of the resources above.

 

 

1Source: Social Security Administration OIG, Issuance of Social Security Statements, February, 2019.

 

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST Systems, Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber’s or others’ use of the content.

 

© 2019 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.  This article was prepared by DST Systems Inc. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. We suggest that you discuss your specific situation with a qualified tax or legal advisor. Please consult me if you have any questions. LPL Financial Representatives offer access to Trust Services through The Private Trust Company N.A., an affiliate of LPL Financial.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity. 

converting to a Roth IRA

Roth IRA Conversion

,

Good Window of Opportunity for Roth IRA Conversions

The Roth IRA is a powerful tax-favored retirement option since it can offer a hedge against future tax-rate increases. But beyond tax planning considerations,

Roth IRAs have several important advantages over traditional IRAs:

  1. Unlike a traditional IRA, a Roth IRA distribution is tax-free if you’ve had the account open at least five years, and reached the age of 59½, become disabled or died.
  1. You can make contributions to your Roth IRA after age 70½, depending on whether you fall within the earned income limits.
  2. Roth IRAs are not subject to the traditional IRA rules for required minimum distributions at age 70½.

The Internal Revenue Code allows IRA owners to convert significant sums from traditional IRAs to Roth IRAs. But you have to follow these important rules (among others):

  • The ability to contribute tails off at higher incomes. For 2019, the eligibility to make annual Roth IRA contributions is phased out between modified adjusted gross income (MAGI) levels of $122,000 to $137,000 (unmarried individuals) and $193,000 to $203,000 (married joint filers).1
  • The conversion is treated as a taxable distribution from your traditional IRA. Doing a conversion likely will trigger a bigger federal income tax bill and possibly a larger state income tax bill. However, today’s lower federal income tax rates might be the lowest you’ll see in your lifetime, and the tax benefits of avoiding higher taxes in future years may extend to family members after death.

 

Many tax experts suggest that the best reason to convert some or all of your traditional IRA to a Roth IRA is if you believe your tax rate during retirement will be the same or higher than what you are paying currently. Since you’re no longer allowed to reverse a Roth IRA conversion, it’s important to understand the tax ramifications. Talk to your tax advisor before taking any action.

 

Traditional vs. Roth IRA: High-level Comparison

Here is a simplified comparison of IRA rules and tax benefits. Remember, tax laws are complex and subject to change. Consult a tax advisor about your individual situation before taking action.

 

Traditional IRA Roth IRA
Age limits for contributing You must be under 70½ to contribute. You can contribute to a Roth IRA at any age.
Income limits for contributions Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits. Your contributions can’t exceed the amount of income you earned in that year or other IRS-imposed limits, and can be reduced or eliminated based on your modified adjusted gross income.
2019 tax-year contribution limits If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.) If you are under age 50, you can contribute up to $6,000. If you are older than age 50, you can contribute $7,000. (Limits can be lower based on your income.)
Claiming deductions on tax return You may be able to claim all or some of your contributions. You cannot deduct your Roth IRA contribution.

 

 

 

 

 

 

1       Source: Bill Bischoff, “How the new tax law created a ‘perfect storm’ for Roth IRA conversions in 2019,” MarketWatch.com, Jan. 16, 2019. https://www.marketwatch.com/story/how-the-new-tax-law-creates-a-perfect-storm-for-roth-ira-conversions-2018-03-26

 

This material was created for educational and informational purposes only and is not intended as ERISA, tax, legal or investment advice. LPL Financial and its advisors are providing educational services only and are not able to provide participants with investment advice specific to their particular needs. If you are seeking investment advice specific to your needs, such advice services must be obtained on your own, separate from this educational material.

 

Kmotion, Inc., 412 Beavercreek Road, Suite 611, Oregon City, OR 97045; www.kmotion.com

 

© 2019 Kmotion, Inc. This newsletter is a publication of Kmotion, Inc., whose role is solely that of publisher. The articles and opinions in this publication are for general information only and are not intended to provide tax or legal advice or recommendations for any particular situation or type of retirement plan. Nothing in this publication should be construed as legal or tax guidance; nor as the sole authority on any regulation, law or ruling as it applies to a specific plan or situation. Plan sponsors should consult the plan’s legal counsel or tax advisor for advice regarding plan-specific issues.