News & Articles

Be Careful When Saving for Your Kids' Education

Posted on Wed, Jan 30, 2019

Here's a little-known secret for parents planning to send their children to college in the future: Some of the tax-saving moves you make now could hurt your student's chances for getting financial aid later.

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Tags: Financial Aid, Retirement Accounts, College Savings Plan Accounts

For Richer or Poorer: Financial and Legal Considerations in Marriage

Posted on Mon, May 23, 2016

Last year, the average U.S. wedding cost $32,641 — including engagement rings but excluding honeymoons — according to the 2015 Real Weddings Study published by The Knot, a wedding marketplace and concierge service. That staggering amount represents an increase of more than $5,500 over the past five years.

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Tags: Getting Married, Estate Planning, Retirement Accounts, Wedding Planning, Marriage

Squeeze More Out of a Company Simplified Employee Pension Plan (SEP)

Posted on Thu, Aug 21, 2014

If you want a retirement plan for your small company or self-employed business -- but you don't want to be buried in paperwork -- consider a simplified employee pension plan or SEP.

Among the appealing advantages:

1. SEPs are set up by simply filling out a brief form.

2. Annual reports aren't required to be filed with the IRS, although you must provide a copy of the SEP form to each covered employee. (Most retirement plans require detailed reports to be filed with the IRS and the Department of Labor.)

3. Contributions can go from zero to the maximum each year, so if your company has a bad year you can skip the contribution.

4. SEPs allow for "look-back" contributions. As an example, you can make a SEP contribution, up until the date you file your tax return (including extensions), and deduct that contribution on that tax return.

5. Employees make their own investment decisions. All SEP contributions are fully vested and portable. In fact, SEPs are sometimes referred to as SEP-IRAs. The maximum contributions are 25 percent of compensation for employees, or 20 percent of self-employment income for sole proprietors, partners and LLC members. The absolute maximum amount that can be contributed to an account and deducted is $52,000 for 2014 (up from $51,000 in 2013).

All in all, if you are a small corporation or self-employed, the ease of a SEP may simplify your life and help fund your retirement. Consult with your tax adviser for more information.

Despite the Advantages, there Are a Few Downsides:

All of the SEP funding comes from you. And you may have to contribute on behalf of employees that you'd like to exclude.

If you have a large, relatively high-paid work force, sponsoring a SEP can be expensive.

There is 100 percent vesting right away so you have little or no control over what each employee does with the money. If a staff member wants to take out their funds prematurely and pay the taxes and penalties right away, you can't prevent it.

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Tags: EHTC Article, Retirement, Retirement Accounts, SEP, Newsletter, Articles, Simplified Employee Pension Plan

Leaving IRA Money to Charity: A Tax-Smart Strategy

Posted on Wed, Aug 20, 2014

These days, many people have a large percentage of their wealth in the form of traditional IRA accounts. In most cases, this is because significant distributions have been rolled over tax-free from qualified retirement plans to these IRAs. A lot of people also have charitable intentions. If this sounds familiar, there's a tax-saving strategy you should know about: Consider designating your favorite charity or charities as beneficiaries of all or a portion of your IRAs. Then leave other assets to family members or other heirs.

Should You Leave Roth IRA Balances to Charity?

Naming a charity as the beneficiary of your Roth IRA is generally inadvisable. Instead, leave Roth balances to your loved ones by designating them as the account beneficiaries. Here's why: As long as your Roth IRA has been open for more than five years before withdrawals are taken by heirs, all their withdrawals will be federal-income-tax-free.

But if you leave Roth IRA money to charity, this valuable tax break is completely wasted.

Remember: the required five-year period before federal-income-tax-free withdrawals can be taken starts on January 1st of the year for which you made the initial contribution to your Roth IRA. This includes contributions made by converting traditional IRA balances to Roth status.

For example, let's say you make your initial Roth IRA contribution for the 2014 tax year on April 14th of 2015. You nevertheless start counting on January 1, 2014 for purposes of meeting the five-year rule.

This strategy makes sense, because an IRA that is owned by a relatively well-off person can be a sub-optimal asset to leave to your loved ones. Under current tax law, such an IRA may be subject to double or even triple taxation.

Take a look at how it works:

  • First, your traditional IRA account is included in your estate for federal estate tax purposes when you die. That's tax number one.

  • Next the taxable portion of the IRA balance (which is often the entire amount) is counted again as "income in respect of a decedent" (IRD) for federal income tax purposes. That means federal income tax will be owed when IRA withdrawals are taken by your estate or your heirs. That's tax number two.

  • To make matters even worse, state income tax may be due as well. If so, that's tax number three.

After all these taxes have been paid, your heirs may receive only a very small fraction of your IRA money while tax collectors get the lion's share.

A Charity as IRA Beneficiary is the Cure

A tax-smart solution is to leave some or all of your IRA money to charitable beneficiaries while leaving everything else to other heirs you choose. The net result will be more after-tax cash for them. At the same time, you can satisfy charitable inclinations after you die. Sound good? Here are the details.

By naming one or more tax-exempt charitable organizations as beneficiaries of your IRA, you leave that money to the charities after your death. Under our current federal tax system, that is the only way to leave IRA balances directly to charity, although proposals have been made to change that.

As an alternative to leaving money to charities after your death, you could take money out of your IRAs now, pay the resulting income tax, and then give cash to qualified organizations. Your contributions would be fully deductible for income tax purposes, although income-based restrictions might limit your charitable write-offs. In that case, you may have to claim your deductions over several years. Depending on your taxable income, you may never be able to completely write off large donations. As you can see, this can be an inefficient way to satisfy your charitable desires.

On the other hand, leaving IRA money directly to charities upon your death by designating them as account beneficiaries is very tax-efficient. First, an IRA balance left to charity avoids the federal estate tax, since it is removed from your estate for federal estate tax purposes. Second, there's no federal income tax due on the IRA money (the IRD rules don't apply). There's no state income tax either. Finally, no income taxes are due when your favorite tax-exempt charities take their withdrawals from the IRAs. So you avoid double or triple taxation in a simple way.

If you are planning to make bequests to your loved ones, you can leave gifts of assets that are eligible for the federal income tax basis "step-up" to fair market value, as of the date of your death. These include common stocks and mutual fund shares held in taxable investment accounts, ownership interests in your small business, real estate, and just about anything else that qualifies for capital gain treatment when it is sold. Thanks to the basis step-up break, these assets can be sold by your heirs with little or no income tax (only post-death appreciation would be taxed). So there are no double taxation worries. However, they will be included in your estate for federal estate tax purposes, assuming your estate is taxable.

When all is said and done, this strategy allows you to leave more to your favorite charities, more to your loved ones, and less to the tax collector.

You can generally take the same steps with other types of tax-deferred retirement plan accounts as long as the accounts have specific balances. These include 401(k), corporate profit-sharing, SEP, and Keogh retirement accounts. If you're married, however, state law may require you to obtain your spouse's permission to name charities as beneficiaries of these accounts.

Conclusion: Designating your favorite charity as a beneficiary of your traditional IRA (and other tax-deferred retirement accounts, if your spouse approves) can be a tax-smart maneuver. With advance planning and the federal estate tax exemption, you have much more opportunity to minimize both federal and applicable state income and estate taxes. Contact your tax adviser if you have questions or want additional information.

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Tags: EHTC Article, Retirement Accounts, Tax Savings, Charitable Donations, Newsletter, Articles

Retirement Planning: Foresee to Provide for the Future

Posted on Tue, Aug 19, 2014

In a well-known Aesop's Fable, ants stockpile food during the summer bounty, while the grasshopper sings and plays. When winter sets in, the grasshopper starves. The moral of the story is to work hard and plan ahead. In modern times, this lesson can be applied to retirement planning.

What Else Does the Fed Survey Reveal About Household Finances?

The Federal Reserve's Report on the Economic Well-Being of U.S. Households in 2013 provides a "snapshot" of how U.S. households are faring financially. It monitors their recovery from the Great Recession and concerns, including:

Financial well being. The recession took its toll on many households, with 34 percent saying they're worse off financially than they were five years ago. Although more than 60 percent of households are "doing okay" or "living comfortably," a quarter are "just getting by" and more than 10 percent continue to struggle.

Home values. Among people who had owned their homes for at least five years, 45 percent reported that their home values were lower than in 2008. However, homeowners were generally upbeat about the 12-month outlook for their local housing markets.

Savings. The recession depleted savings for many people. About half of households currently maintain a savings account, but only 39 percent believe their rainy-day funds could cover three months of expenses. One-fifth of households routinely spend more than they earn each month. And only 48 percent could pay a $400 hypothetical emergency expense without selling something or borrowing money.

Financing. More than 40 percent of respondents delayed a major purchase and nearly 20 percent postponed a major life decision during the recession. This was at least partially due to limited financing opportunities. The availability of credit remains a concern for most people. One-third of credit applicants were turned down or given less than they applied for. Many people (19 percent) didn't bother applying for credit for fear of rejection.

Student loans. Nearly a quarter of households are carrying education debt incurred by themselves or their spouses, partners, or children. The average student loan debt is $27,840. Some households struggle to pay this debt, especially if they failed to complete the educational programs. In fact, 18 percent of student loan holders are behind on payments.

Are You an Ant or a Grasshopper?

Unfortunately, many Americans behave more like grasshoppers than ants when it comes to stockpiling money to pay their living expenses during retirement. About one-third of non-retired Americans have no retirement savings or pensions, according to the Report on the Economic Well-Being of U.S. Households in 2013, which was recently published by the Federal Reserve. Almost half of the survey's respondents aren't actively thinking about financial planning for retirement. A quarter of those adults with retirement savings are uncertain exactly how they'll make ends meet during retirement.

Note: The responses varied with age, education and income-levels, however. Not surprisingly, higher-income individuals are the most likely to plan for retirement.

Retirement accounts were hard-hit when the markets collapsed beginning in 2007 -- and many haven't fully recovered. For example, the Standard & Poor's index lost 55 percent of its value between October 2007 and March 2009.

During the recession, many Americans put retirement saving on the backburner -- or took early withdrawals from retirement accounts to pay current bills. In the aftermath, two-fifths of those ages 45 or older have postponed their planned retirement dates due to insufficient savings. Of those between the ages of 55 to 64 who haven't yet retired, 24 percent plan to work as long as possible.

On the other hand, 19 percent retired earlier than expected during the recession, due to involuntary layoffs or company-sponsored early retirement plans. This means their retirement funds will need to last longer than they originally anticipated.

Traditional Sources of Retirement Income Fall Short

Many people expect Social Security to be a major source of retirement income. But Social Security checks are often lower than recipients expect -- and may be hit with taxes, especially if you have other employment or investment income. Check out the online benefits calculator on the Social Security Administration website for details on your projected payments post-retirement.

In addition, fewer Americans are members of defined-benefit pension plans these days. From 1980 through 2008, the proportion of private wage and salary workers participating in defined-benefit pension plans fell from 38 percent to 20 percent, according to the Social Security Administration's Office of Retirement and Disability Policy.

So it's more important than ever to be proactive about stockpiling money for retirement. You also need to be realistic about cost of living increases and build in a cushion for emergencies and unexpected costs when projecting the income you'll need in retirement.

For example, many retired Americans were unprepared for recent increases in the costs of utilities and gasoline. Other expenses -- such as Internet and cell phone accounts -- didn't exist when some of today's retirees made their initial plans. Americans are also healthier than past generations, living longer and incurring higher-than-expected medical expenses.

Advance Planning Can Avert Shortfalls

A financial adviser can help you plan far in advance to build up a nest egg that will provide sufficient income to maintain financial security for potentially many years. In addition to Social Security and pension benefits, here are other common sources of retirement income:

  • Self-directed accounts, such as company-sponsored 401K plans and individual retirement arrangements (IRAs);

  • Home equity; and

  • Part time or self employment.

A part-time job in the early years of retirement can make a big difference to your financial picture. Earning even $4,000 a year replaces the income you could reasonably expect to generate from a $100,000 portfolio. It also provides a buffer against unexpected inflation. The flip side of this coin is that it might be difficult to find a job as you grow older and, of course, work doesn't appeal to all retirees. Poor health can also render some people physically unable to work into retirement, so it's always smart to have a Plan B.

Retirement saving strategies need to be designed with your age, relationship status, lifestyle, minor children, and other heirs in mind. Whether you're starting your first job or hitting middle age, savings patterns are likely to change. By the time you near or hit retirement age, investments and savings should be set and established, with your funds in low-risk, high-liquidity accounts.

It's Never Too Late to Save

Individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions to certain accounts, if their retirement savings seem too lean. Here are some of the contribution limits in 2014:

  • Traditional and Roth IRAs, $5,500 ($6,500 for those over age 50),

  • 401(k) accounts, $17,500 ($23,000 for age 50 and up),

  • SIMPLE accounts, $12,000 ($14,500 for age 50 and up), and

  • Simplified Employee Pension Plan (SEP) accounts, $52,000 (there is no SEP catch-up amount).

Whenever possible, it's a good idea to contribute the maximum allowable to your retirement account to secure your future and get the full tax advantage.

What's Your Retirement Plan?

If you haven't saved much for retirement or stopped contributing during the recession, it's time to get your plan in motion. If you already have a plan in place, consider revisiting it occasionally. A retirement plan isn't something you can put on a shelf and ignore until you reach age 65. You may need to revise your initial plan as market conditions, tax laws, financial needs or health factors change. Contact your financial adviser for more information.

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Tags: EHTC Article, Retirement, Savings, Retirement Accounts, Finances, Newsletter, Articles, Retirement Planning

IRS Allows Exceptions for Missed Retirement Account Rollover Deadlines

Posted on Sat, Aug 09, 2014

You may know about the 60-day window for making tax-free rollovers of funds withdrawn from your IRA or other tax-favored retirement account. Here are a couple of things you might not know about the deadline:

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Tags: EHTC Article, Retirement Accounts, IRS, Tax-Free Rollover, Private Letter Ruling, Newsletter, Articles