News & Articles

Retirement Savings: Are You Currently On Track?

Posted on Mon, Aug 23, 2021

Employment disruptions caused by the COVID-19 economic slowdown have scrambled the retirement saving strategies of many Americans. According to a recent survey, nearly half of employed Americans either reduced or suspended their retirement savings during the pandemic.

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Tags: Retirement, Retirement Planning

When Should You Take Social Security Benefits?

Posted on Thu, Mar 04, 2021

If you're nearing retirement, you've likely paid into the Social Security system your entire career. It's only fitting that you finally cash in on the Social Security benefits that are rightfully yours. But when should you start receiving benefits — at the first available date, at the latest date or somewhere between those dates?

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Tags: Retirement, Social Security

Age-Related Tax and Financial Planning Milestones

Posted on Wed, Feb 12, 2020

In an era of uncertainty, you can count on one thing: Time marches on. While you can't beat Father Time, you can prepare for these age-related tax and financial planning milestones as you and your loved ones grow older.

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Tags: Retirement, Social Security, Retirement Planning, Kiddie Tax

ROTH IRAs: A Great Estate Planning Vehicle

Posted on Wed, Dec 06, 2017

Roth IRAs are a great tax saving vehicle. The reason: Investments held in a Roth IRA are allowed to build up federal-income-tax-free. Later on, you can take federal-income-tax-free withdrawals. Obviously, a zero tax rate is the best rate going.

Tax-Free Roth Withdrawals

There are only two requirements for tax-free withdrawals. You must:

1. Have a Roth account that's been open for more than five years.

2. Be age 59 1/2 or older.

In addition to being great tax saving tools for retirement, Roth IRAs also provide tremendous estate planning advantages -- especially if you can get a large portion of your wealth into an account.

Unfortunately, getting lots of money into a Roth IRA is not so easy. It can take many years of annual contributions. However, there's also one very quick way -- by converting an existing traditional IRA or SEP account into a Roth IRA. There are no limitations on the size or number of converted accounts. Naturally, under tax law, there is a price for allowing you to jump start your Roth IRA savings program with a conversion. Even so, it may be worth the price.

Roth Conversion Basics

A Roth conversion is treated as a taxable distribution from your traditional IRA. In other words, you're deemed to receive a taxable cash payout from your traditional IRA with the money going into the new Roth account. So the conversion triggers a current income tax bill. In most cases, however, this negative factor is outweighed by the following positive factors.

    • You don't have to pay the 10% premature withdrawal penalty tax on the deemed distribution that results from the Roth conversion transaction. This is true even if you're under age 59 1/2 when the conversion takes place.
    • Your conversion tax bill may be significantly lower, depending on the future fate of tax rates. Some people believe the tax rates we have today could be the lowest rates we'll see for the rest of our lives. No one knows, of course, but now could be a good time for a Roth conversion.
    • The value of the traditional IRA (or IRAs) you want to convert may still be down because of poor investment performance in recent years. However, a lower account balance means a lower conversion tax bill, which is a good thing.

Now for the Estate Planning Angle

The usual reason for converting a traditional IRA into a Roth account is to earn tax-free income that will be withdrawn after age 59 1/2 to help finance your retirement. But if you don't really need the money for retirement, there's another less-publicized advantage to converting. Let's say you would like to pass along as much wealth as possible to your heirs. If so, a Roth conversion transaction can be a great estate planning technique for you.

Don't misunderstand. Roth IRA balances are not exempt from the federal estate tax (nor are traditional IRA balances). However by paying the up-front Roth conversion tax bill, you effectively prepay your heir's future income tax bills while reducing your taxable estate at the same time. And this prepayment of income tax doesn't result in any gift tax or diminish your $5.60 million federal gift tax exemption for 2018 or any federal estate tax exemption (up from $5.49 million in 2017).

But there is even more to pass on to your heirs. A big advantage of Roth accounts is they are not subject to the required minimum distribution rules that apply to traditional IRAs. These rules force the account owner to begin liquidating his or her IRA after turning age 70 1/2. Of course, this means Uncle Sam and state tax collectors take their cut in the form of taxes on the distributions. When you don't need the IRA money, being forced to take these required minimum distributions and pay the resulting income taxes can be pretty costly.

But converting a traditional IRA into a Roth account stops required minimum distributions. Once a conversion is complete, you are free to leave the account balance untouched and accumulate as many tax-free dollars as possible to pass along to your heirs.

However, the required minimum distribution exemption ends when you die. At that point, the Roth IRA falls under a set of the required minimum distribution rules that apply to all inherited IRAs (traditional and Roth). If your heirs are disciplined enough to take only the annual required minimum distribution amounts from the inherited Roth IRA, the account liquidation process can be strung out for many years, as the following example illustrates.

What happened in this example? In effect, the husband and wife took advantage of the Roth IRA rules to establish a nice federal-income-tax-free annuity for their daughter.

For this planning technique to work as it does in the above example, you must take four steps:

Step 1 - Designate your spouse as the Roth IRA beneficiary before you die.
Step 2 - After your death, your spouse must treat the account as his or her own by re-titling it in his or her name.
Step 3 - Your spouse must also name your child as the new Roth IRA beneficiary.
Step 4 - Finally, your child must begin taking annual required minimum distributions by no later than December 31 of the year following the year of your spouse's death. Otherwise, your child will be required to liquidate the inherited Roth IRA after only five years, which would end the tax-free strategy prematurely.

As you can see, a Roth IRA can be a great estate planning vehicle. However, before implementing this strategy, get professional advice about the conversion tax consequences and the estate planning considerations.

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Tags: Roth IRA, Retirement, Estate Planning, Roth IRA Conversion

Maximize Social Security Benefits When You Retire

Posted on Wed, Sep 20, 2017

Get the most from Social Security. Younger retirees face a harsh penalty for working part-time. For every $2 earned over $16,920 in 2017 (up from $15,720 in 2016), you lose $1 in Social Security benefits. In the year you reach full retirement age, a higher earnings threshold applies. Your benefits will be reduced by $1 for every $3 of earnings only when earnings exceed $44,880 in 2017 if you reach full retirement age (up from $41,880 for 2016).

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Tags: Benefits, Retirement, Retirees, Social Security

Financial Survival Tips for Recent Graduates

Posted on Wed, May 03, 2017

Graduation can be one of the most exciting — and intimidating — times in your life. You're officially an adult, and with that new-found independence comes financial responsibilities. No pressure, but the decisions you make today about spending and saving can mean the difference between struggling for the rest of your life and building a solid financial future.

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Tags: Retirement, Vehicle, Planning, Insurance

FAQs about Social Security Retirement Benefits

Posted on Tue, Jul 19, 2016
For years, people have questioned the long-term viability of the Social Security system. In June, the Social Security Board of Trustees released its annual report on the long-term financial status of the Social Security Trust Funds. It projects that the combined asset reserves of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) Trust Funds will become depleted in 2034. Additionally, the Disability Insurance Trust Fund will become depleted in 2023.

More generally, people approaching retirement age often have other questions about benefits they may be eligible to receive from the Social Security Administration (SSA). Here are the answers to several common inquiries.

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Tags: Benefits, Retirement, Social Security, Income Tax

Why Business Owners Don't Plan for Succession -- and Why it's Critical

Posted on Fri, Oct 31, 2014

Many business owners procrastinate putting a well-conceived succession plan in place. The reasons are understandable. It can be difficult to plan for your replacement and deal with your mortality.

Here are five of the top reasons why business owners don't have an exit strategy, along with the reasons why it's best to make a proactive plan.

Reason Number 1: No Time. Business owners are busy with the day-to-day tasks involved in running their companies. There are deadlines to meet and deals to be made. Succession planning can be done ... later.

Why this thinking is wrong: Waiting too long can cause the outcome to be less beneficial to the owner and his family. If a rushed decision is made, the owner may get a low price or pay more in taxes than he or she would if adequate planning was done. And in a worst case scenario, "later" may never come. An unexpected death or disability might result in succession occurring sooner than expected and without a solid plan, the future of the business can be placed in jeopardy.

Reason Number 2: Loss of Control. In some cases, business owners may not want to stop working for the companies they spent years building. Giving up control is difficult. Owners may worry they will be bored in retirement or their companies will no longer flourish if they are not in charge. So they hang on.

Why letting go is a better approach: The most successful exit strategy takes months or even years to complete. With proper planning, you may be able to secure a position after the sale as a consultant. If you want to pass on the business to your children or grandchildren, you can be involved in training them to help them achieve success. In other words, a proactive approach brings more control over the end result.

Reason Number 3: Ignoring Tax Issues because they are Complex. There are obviously a number of ways to structure a succession transaction. The most tax-efficient way depends on the company, the parties involved and when you sell (federal tax capital gains rates may increase in the future). The tax implications of a sale or transfer can be extremely complex.

Why it's best to get professional tax advice: You have to make several decisions that will affect the tax bill, such as whether to sell assets or stock. Your company may wind up with unknown, costly liabilities if the transaction isn't structured properly. Handling the sale in a tax-wise manner can save you a fortune in the long run -- not only with income and capital gains taxes but also with estate and gift taxes. Consult with your tax adviser well in advance of the actual sale.

Reason Number 4: Not Sure Who Is Going to Take Over. For many owners, there is not a clear-cut successor. Are there partners? Should you sell to employees via an Employee Stock Ownership Plan (ESOP)? Sell to a third party?

In the case of a family business, there are even more questions. What if some children are active in the company and others are not? Which child is going to run the company? Does the "heir to the throne" have the business skills to succeed? Will a formal succession plan cause family conflict?

Without all the answers, a business owner may do nothing.

Why this is a mistake: Without a solid plan, the company you spent years building could cease to exist. There are many options for ownership transfer. You can sell outright, sell to your children, gift interests to family members at a low tax cost -- and more. But if you don't explore the possibilities, you leave the outcome to chance.

Reason Number 5: Not Enough Retirement Savings. While building their businesses, many owners put off making adequate contributions to retirement plans. The result may be insufficient savings. Where is income going to come from during retirement -- especially if the owner wants to pass the company onto family members? Often, there is a conflict between wanting comfortable golden years and wanting to transfer the company to heirs as part of an estate plan. So the owner just keeps working.

Why continuing to work without a succession plan is a mistake: By planning ahead, you can take care of your retirement and your heirs. With certain financial strategies, you may be able to retire comfortably and plan for the eventual sale or transfer of the company.

These are just some of the reasons business owners procrastinate and why they need to have proactive exit strategies. Start well in advance. Assemble an advisory team that includes your accountant, estate adviser, corporate attorney, and possibly other professionals.

And if transfer your business to your children, urge the next generation to start thinking about their succession plans.

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Tags: EHTC Article, Retirement, Owners, Business, Succession Planning, Business Succession, Valuation, Newsletter, Articles

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

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