The Wiewel Law Firm

Learn about RMDs before You Begin Withdrawals

RMDs are legally required and it is best to study up on them, because taxes can be 50%.

Required minimum distributions are not always a common name to retirees but they should be, according to Forbes in “5 Things to Know About RMDs.” The withdrawals are legally required and you have to take them, despite the fact they can have a big impact on cash flow, taxes and financial planning during retirement.

There are ways to soften the impact of RMDs. However, you have to know the rules before you can create your strategy. Having a game plan for RMDs will help save the money you saved for many years, and allow that retirement nest egg more time to grow.

Note that there may be some changes coming as a result of the SECURE Act and the RESA Act, if approved.

Distribution rules that you need to know. The year you mark your 70½ birthday, that is, six months after you turn 70, you have to start taking RMDs from retirement accounts, including 401(k)s. That rule does not apply to Roth IRAs, which generally do not have any RMDs, until the owner dies.

The exception is if you are still working at a company and participating in the company’s 401(k) plan. If that is the case, you may want to roll over all your previous eligible savings into that account, to delay taking an RMD. However, there are also exceptions to this rule. They depend on your ownership stake in the company, so speak with an estate planning attorney to be sure what the requirements are for your situation.

While you’re at it, make sure that the beneficiaries listed on your accounts are correctly documented. If it’s been more than a few years since you last reviewed your beneficiaries, there may be some time bombs hidden in your IRA accounts. Divorce, death and changes of circumstances may make it necessary for you to change your beneficiaries. Do it now, while it’s on your mind. Once you die, there’s no recourse for your heirs.

When do I take my first RMD? RMDs must be taken by December 31^st of each calendar year. However, the first RMD must be taken for the year in which you turn 70½. You can delay that payment until April of the following year. If you end up taking two big distributions, will it throw your tax planning off? Will you be bumped into a higher tax bracket? This is why you need to plan your RMD out carefully. It may be better for your overall situation to take the RMD, as soon as you are eligible.

Accuracy counts. You can’t rely on an online calculator, since the rules are not one size fits all. Let’s say your spouse is ten years younger than you and is your sole beneficiary. You’ll need to use the Joint Life and Last Survivor Table. There’s also the Uniform Lifetime Table, but that doesn’t apply here. Check with professionals to be sure you are taking the right amount.

Where does your RMD come from? Even if 70½ is a few years away, it’s good to have a plan for how RMDs will impact the distribution of your investment portfolio. You have options, so you want to make a good choice. For example, do you want distributions to be made in proportion to the percentage of each of your holdings in your portfolio? Let’s say 40% of your retirement investment is in short-term bonds, then you would take out 40% from your investment holdings. Or do you want to take a percentage from specific holdings?

What about charitable giving? Once you turn 70 ½, you can directly transfer funds from a traditional IRA to a charity, which can reduce your tax burden. However, this must be done properly, directly to the charity.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, as well as make sure RMDs are handled to your best advantage.

Reference: Forbes (May 14, 2019) “5 Things to Know About RMDs”

The Self-Employed Gain Benefit with Single 401(k)

There are benefits to being self-employed. However, saving easily for retirement hasn’t been one of them.

Without an automatic withdrawal from a regular income payment, it’s tough for the self employed to save toward retirement. However, there is an option, according to Next Avenue in “A Retirement Plan for the Self-Employed: The Single 401(k).”

Known as the Single 401(k), the Self-Employed 401(k), Individual 401(k), or the Solo 401(k), this is a retirement plan designed for self-employed people or sole proprietors, and if applicable, also for their spouses. With a Single 401(k), 100% employee salary deferral of up to $19,000 is permitted in 2019, if you are under 50. If you’re over 50, that number can go up to $25,000. It also allows an employer profit-sharing contribution of up to $56,000 per year, which lets you save even more by being both the employer and an employee of your business.

Using the Single 401(k) can save you more than $14,000 in taxes per year (that is, assuming a $56,000 contribution and a 25.7% corporate tax rate), while simultaneously offering a loan provision, just in case you need to tap your savings.

Who qualifies for a Single 401(k)? You have to be truly self-employed, either in your own full-time small business or a part time gig. Your business can be a sole proprietorship, partnership, or corporation, but it can only have no other employees or employees who aren’t eligible to participate in a traditional 401(k). Examples of people who aren’t eligible would be people who are under age 21 or who work fewer than 1,000 hours per year.

The Single 401(k) works well for a husband/wife partnership or a small business with only part-time employees.

It provides flexibility so that when times are good, you can put away a lot. When times are lean, you can save less. Additional benefits:

• Reduced taxable income for pre-salary contributions.
• Built-in profit sharing for maximum savings deductible against business income.
• The cost of the plan is a deductible expense.
• Investments grow tax deferred.
• Higher contribution limits than SEPs and SIMPLE IRAs.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include a Single 401(k).

Reference: Next Avenue (May 3, 2019) “A Retirement Plan for the Self-Employed: The Single 401(k).”

Families Deal with Estate Planning Opportunities

The basics of estate planning can deal with various situations.

Since family situations differ greatly, there can be challenges and opportunities as the members deal with estate planning basics, according to the Chicago Tribune in “Dealing with property transfers and gift taxes.”

In a situation in the article, the family home was rented to a daughter and her spouse as a “rent-to-own” property. This is generous, since it gives the daughter an opportunity to build equity in a home. The parent had questions about what kind of a deed would be needed for this transaction, and if any gift taxes need to be paid on the gift of the house and a separate parcel of land.

For starters, there are tax advantages while the person is living, since the home is an investment for the owner, as described above. On the day that the home is deeded over to the daughter, she will own the home at the cost basis of the parent. Here is why. The IRS defines the “cost basis” of a real estate property as the price that the owner paid for it, plus the cost of purchase and any fees associated with the sale plus the cost of any new materials or structural improvements.

When you give someone a home, they receive it at the price that was paid for it plus these costs.

Let’s say this person paid $50,000 for the family home, and it’s now worth $100,000. If you give the home to a family member, it’s as if she paid $50,000 for it, not $100,000. There may be tax consequences when she goes to sell it, but that’s in the distant future.

It’s different if the home is inherited. In that case, if the house was valued at $100,000 on the date that the owner died, the heir’s cost basis would be $100,000. However, if the heir sold the property on the exact same day (this is an unlikely scenario), there would be no tax owed on the sale for the heir.

This is a very simplified explanation of how a home can be passed from one generation to the next. It would be best to speak with a good estate attorney, who can evaluate all the factors, since every situation is different. One suggestion might be to put the property into a living trust, in which case the daughter will still pay rent to the parent, but then would inherit the property when the parent died.

The estate planning attorney could use the same living trust for the separate parcel of land. Once the home and the land are deeded into the living trust, the owner can state her wishes for how the properties are to be used.

As for the question of gift taxes, anyone can give anyone else $15,000 per year, with no need to file any forms with the IRS or pay any taxes. If you give someone more than $15,000 in one year, the IRS requires a gift tax form with the federal income tax return.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances, including the best way to transfer a family home under the laws of your state of residence.

Reference: Chicago Tribune (April 23, 2019) “Dealing with property transfers and gift taxes”

Entertainment World often Looks at Retirement

Many retirement strategies are often presented in Hollywood.

Even though it is an unlikely source of planning for retirement, the movie industry often leads to the thought process about the later years of life, according to USA Today in “Hollywood can inspire you to save more in your 401(k) for retirement.”

If you remember Jack Colton, the male lead in 1984’s “Romancing the Stone,” then you know about a guy who spent his whole life dreaming of owning a sailboat, even while he was hiding from a foreign army and getting involved in a crazy criminal treasure hunt. Retirement savers need to find their own inner dream, one they cannot be distracted from and that will keep them focused on saving and investment, no matter what. Imagine your future self-doing what you love doing.

Then there’s “The Bucket List,” with Carter and Edward, who are ready to have an adventure, when their diagnoses are terminal. If you’ve got some thoughts about a bucket list floating around, make them real. Write them down. Then put them in order of priority. Visualize what you’ll need to do to get there. Building your connection with your dreams, will keep you motivated.

An example of keeping your eyes on the prize comes from Netflix, with “Fuller House.” This is a great example of how mapping goals can clinch a retirement strategy. Sitcom dad Danny Tanner gives his San Francisco home to his daughter. He’s not retiring, but he planned for years to live where he wanted, while giving his daughter and her family his home. Know where you want to live in retirement and keep that in sharp focus.

“Everybody Loves Raymond” features Ray and his family and his parents. They live close together, so much so that they are involved in every detail of each other’s lives. Or, for a completely different lifestyle, remember the 2012 comedy “Quartet,” directed by Dustin Hoffman? This was about a retirement community for stage performers, who sought to create a new community among their fellow actors.

Figuring out who you want to spend your retirement years with, can have a major impact on where you will live. Do you want to be close by your family, involved with their daily lives, available for babysitting, family dinners, and the grandchildren’s soccer games? Or would you rather pursue your own interests and enjoy a warm climate?

Reference: USA Today (Nov. 11, 2018) “Hollywood can inspire you to save more in your 401(k) for retirement”

Only One of You Involved in the Finances?

There are ways to make both members of the couple knowledgeable about finances.

There can be a high cost to the surviving member of a couple, if the member who passed away was the person who handled all of the household finances, according to The Wall Street Journal in “When One Spouses Handles Finances.”

The cost of not knowing where the money is, how investments are structured, the state of retirement savings, or the daily details of how bills get paid, can be quite high, when one spouse is unexpectedly put in charge.

Spouses are urged to take a more active role in the family’s investments and to be certain they are comfortable with the family’s advisors. If they are both are not comfortable with the professionals handling their money and legal matters, it may be time for a change. If the change is made after a spouse dies, it should be seen as a move towards independence, and not a betrayal of the spouse’s legacy.

Studies conducted by financial service companies have found that despite gains in education and, to some extent, compensation, women still let their spouses handle financial decisions. Even millennial women, those born between 1980-1996 (roughly sixty percent) leave those investment decisions to their husbands.

Women are controlling more wealth and are more likely to divorce or outlive their husbands than at any other time in history, so taking the financial reins is very important.

Financial advisors are trying to bridge the gap. Some encourage spouses to create lesson plans, exploring one topic per session and then go to dinner afterwards (without the kids) to discuss wills, insurance and investment basics or whatever the topic of the week was. Others hold quarterly meetings.

It can be frustrating for one spouse to deal with a non-involved spouse, who either doesn’t want to learn or has trouble grasping some of the concepts. In that case, getting a non-related person involved might be a good tactic. Set up meetings with your estate planning attorney, financial advisor, and CPA that are geared to reviewing your family’s assets and estate plan, with the focus on bringing the non-involved spouse up to speed.

Make it personal and rewarding. It’s far more fun for someone to open their own “50^th Wedding Account” and learn by investing, than to get drilled on a textbook lesson. If one spouse dreams of travel, turn working together on budgets and investments with specific trips in mind into a motivating force.

Reference: The Wall Street Journal (Oct. 22, 2018) “When One Spouses Handles Finances”

Boomers and Retirement: Big Decisions, Changes

There are are many guidelines and proposals, but what is right for you?

A key challenge that is likely to be faced by boomers as retirement approaches, is how much should be set aside for the retirement years, according to Florida Today in “Some important considerations for retirement.”

The biggest issue in many families, is deciding how much money to spend from their retirement savings accounts and investments. There are many guidelines and formulas. However, no one formula is correct for every situation. It requires a closer look to consider where to draw funds from: retirement accounts or investment accounts, pre-tax or after tax?

There also need to be adjustments made for market volatility and risk tolerance.

It is hard to adjust from living on a steady stream of income from work, to depending on withdrawals from what used to be accounts that were only for savings. A well-designed plan and a specific set of actions on how to live on retirement savings without taking too much money, especially at the start of retirement, is critical.

Retirees need to understand that they may, if they are lucky, be retired for more than one or two or more decades. A balance of taking not too much, nor too little, is what is needed to avoid running out of money, or frankly, not enjoying these last decades of their lives.

Savings need to last longer and must also retain their purchasing power, so that inflation, taxes and healthcare costs do not decimate accounts. We have lived through a historically low interest rate environment for many years. However, that is starting to change. We must be prepared.

Adding to the stress for retirees, is not having an estate plan in place. Speak with an estate planning attorney to ensure that you have a will, medical directives, power of attorney forms and, if appropriate, any trusts.

What often occurs is that one spouse knows everything about all the couple’s finances. When one spouse passes, the other is often left to figure it all out on their own. A better plan is to ensure that both spouses have a complete picture of their financial and legal situation. Both spouses should sit down with the estate planning attorney to ensure that they are both up to speed on what will happen when the inevitable occurs.

Single individuals need to prepare for retirement, with the additional burden of having to rely solely on themselves for funds. Planning for incapacity and general estate planning is more important, as non-family members must be found who can be trusted to make decisions on their behalf, if they are unable to do so and for distribution of their assets after death.

Resource: Florida Today (Oct. 22, 2018) “Some important considerations for retirement”

HSA Accounts are a Fine Retirement Option

Many Americans don’t know about them or fail to use them, despite the advantages.

Even though health saving accounts (HSA) are an excellent retirement tool, many people still don’t know about them or take advantage of them, according to CBS Moneywatch in “Many savers missing out on the HSA’s benefits for retirement.”

One strength of an HSA is, unlike flexible spending accounts, HSA funds never expire, and they stay with you from job to job. HSA account holders have accumulated more than $51 billion in these special savings plans, a 20.4% increase since 2017. The number of HSAs exploded by more than 11%, totaling 23.4 million accounts.

Despite these numbers from the 2018 Midyear Devenir HSA Market Survey, many people who have HSAs aren’t taking advantage of the tremendous long-term benefits the accounts offer. Through the first half of 2018, the story reports that total HSA contributions were nearly $20 million, while withdrawals totaled more than $13.7 million.

In other words, more people are using HSAs as a pass-through and are receiving only a small benefit of using tax-free dollars to pay for out-of-pocket medical costs.

The study indicates that more than 80% of HSA assets are not invested in any of a wide range of possible available investments. Invested HSA assets total only $10 billion, a small percentage of the overall accounts. HSAs with invested assets have an average balance of more than $16,000—seven times higher those without invested assets.

HSAs present great potential value.  However, most people don’t understand the opportunity they present.

In fact, people are best served by making the maximum contribution before putting money into another account, with the exception of the matching contribution from their employer’s 401(k) plan.

The money you invest in an HSA is tax-free when it goes into the account, grows in the account tax-free and it’s tax-free when it is used for qualified medical costs. It’s a three-way tax free!

To contribute to an HSA, you must be covered under a health insurance plan with an annual deductible of at least $1,350 for an individual and $2,700 for a family. The maximum annual contribution is $3,450 in 2018 for an individual and $6,900 for a family. If you are 55 or older, you can contribute an additional $1,000.

Remember, the money must be used for qualified medical expenses, although there is considerable flexibility. There are no time limits as to when the money must be used. There’s no age at which you have to start taking money out of the HSA, as there are with IRAs.

If your budget allows, contribute to the HSA and try not to use it for out-of-pocket medical expenses. If there is money in the HSA when you die, and if your spouse is the named beneficiary, the spouse becomes the account owner and can use it. The biggest downside to the HSA, is if you fail to name your spouse as a beneficiary. In that case, the account is fully paid out at your death and is considered taxable income to the non-spouse beneficiary.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances and may include an HSA.

Reference: CBS Moneywatch (Sep. 17, 2018) “Many savers missing out on the HSA’s benefits for retirement”

Women Live Longer but Often Save Less

Expected lifespan should be taken into consideration in savings plan.

Woman face a challenge in the U.S. This is because they have a longer lifespan than men but statistically make less money to be used for saving, according to The Motley Fool in “Why Are Women Only Saving Half as Much as Men for Retirement?”

When queried about why they think it is so difficult for women to save for retirement, most woman honestly said they are living from one paycheck to the next, with little to spare for savings. They are also paying back student loans. Men say much the same thing, so why is the average female saver saving so much less for her future?

In a recent Student Loan Hero study, women admit that they don’t know a lot about investment and retirement planning. Women are also more likely to take breaks in their careers to be caregivers, raising children and taking care of aging parents. This reduces their earnings. While some wage equity has been achieved and even made into law, most women do not earn the same as their male counterparts. Therefore, women face special challenges to their retirement savings.

What can be done to address the gap?

• Start by examining your budget and cutting unnecessary expenses.
• Make sure to maximize your employer’s 401(k) match.
• Fight for raises throughout your career. To gain more information on what your position is worth, use websites like Glassdoor’s “Know Your Worth” tool to compare salary data.
• Consider changing your investment approach. If you have steered clear of stocks over conservative vehicles like bonds, they may be a good way to catch up.

Finally, don’t forget that retirement includes estate planning. An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances.

Reference: The Motley Fool (June 3, 2018) “Why Are Women Only Saving Half as Much as Men for Retirement?”

Considering Roth IRAs? It’s All About the Tax Burden

There are many keys to your income after retirement, including do you plan to travel? Or, what if your health care costs go up?

If you are trying to decide between Roth IRAs and traditional retirement savings, the key is knowing if your retirement income is going to exceed your present income or not, according to USA Today in “Why more people should probably use pre-tax retirement accounts instead of Roths.”

If you think your income in retirement will be higher than it is right now, that’s a reason to put retirement savings into a Roth IRA. However, if you’re already saving for retirement and you expect to maintain the same lifestyle, you’ll want to be sure your retirement income does not exceed your current income, because it’s all about the tax burden.

Comparing your current income as you are working to your expected retirement income, isn’t exactly apples-to-apples. Instead, you’ll need to include calculations of your tax rates for IRA withdrawals and other taxable accounts. People often pay a lower overall tax rate on withdrawals from traditional retirement accounts than they pay on Roth contributions today–even with a higher retirement income.

To fully understand this, you’ll want to understand the difference between marginal tax rates and effective tax rates. The marginal tax rate is the tax rate on your next dollar of income. For example, people say “I’m in the 22% income bracket”—that’s their marginal tax rate. Then there’s the effective tax rate, which is the total tax bill as a percentage of income. This number is always lower than the marginal tax rate.

For every dollar you add to a traditional retirement account, you’re reducing your taxable income and saving on taxes at the marginal tax rate. Every dollar saved in a Roth IRA account is effectively taxed at your marginal tax rate. You could have chosen to save it in a traditional IRA, but you chose the Roth.

Here’s an example: a single person who earns $60,000 annually is in the 22% tax bracket, after taking the $12,000 standard deduction. That single person will have to have an income of $195,105 in retirement to reach a 22% effective tax rate on a traditional IRA withdrawal.

It works better for someone in the 12% income bracket. A man who earns $50,700 annually is right at the top of that 12% bracket, after taking the same standard deduction. He’d have to withdraw $52,605 from a traditional IRA in retirement for it to be worth having a Roth IRA.

This decision requires making correct calculations about how much you intend to spend in retirement.

Reference: USA Today (July 8, 2018) “Why more people should probably use pre-tax retirement accounts instead of Roths”

Getting Younger Heirs to Invest

As is always the case, people in their 20s today have different priorities than their parents and grandparents. Younger priorities often do not include investing in the stock market. This has caused some consternation on Wall Street because today's young adults stand to inherit a lot of money from their parents.

Much has been written about the millennial generation, those people born between 1980 and 2000. Their work ethic, tastes and even general politeness have been questioned by older adults.

One thing that some believe is different about millennials is that they do not just get financial advice from professionals. They also get advice from friends, social media and online gurus.

This is seen as a problem for Wall Street firms who are in the business of selling financial advice and getting people to use their services to invest. Since estimates speculate that millennials will inherit $30 Trillion from their parents and grandparents, it is paramount for Wall Street to attract the attention of these young heirs.

As Bloomberg reports in an article titled "Wall Street Has Its Eyes on Millennials $30 Trillion Inheritance," Wall Street has taken an unusual strategy to attract the attention of millennials, using animation and cartoon like graphics.

Click over to read the original article and see some examples of the cartoon graphics Wall Street firms are using.

One takeaway: if you are planning on leaving a millennial a large inheritance, it might be a good idea to have an estate plan that takes the choice of investing away from them and giving it to a professional.

A trust, for example, could be used instead of leaving the inheritance outright with a professional trustee to help protect the inheritance from and for your millennial loved ones.

If Wall Street is concerned that millennials will not invest their inheritance prudently, perhaps it would be wise for you to be concerned as well.

Reference: Bloomberg (March 3, 2015) "Wall Street Has Its Eyes on Millennials $30 Trillion Inheritance"