What Can You Do if You Can’t Add to a Traditional or Roth IRA?

Traditional IRA and ROTH IRA plans are designed to allow investors to accumulate savings through contributions and earnings.

Traditional IRAs allow for deferred taxes until withdrawals are made, but tax liability is triggered when funds are distributed. On the other hand, there are no tax breaks for Roth IRAs when contributions are made, but eligible distributions are generally tax-free. This includes accumulated investment income.

So with Traditional IRAs, you avoid taxes when you put the money in. With Roth IRAs, you avoid taxes when you take it out in retirement.

Anyone with earned income can contribute to a Traditional IRA, as long as they are younger than 70½. Roth IRAs, however, have income-eligibility restrictions based on a person’s Modified Adjusted Gross Income (MAGI), depending on tax-filing status.

What happens if you are ineligible to participate in a Traditional IRA or ROTH IRA, because for example, you find yourself at the point of maxing out your contribution limits? The current contribution limits are $5,500, and $6,500 for those over age 50, so what might your options be?

If you find yourself ineligible to participate in a ROTH or Traditional IRA, now may be the time to look to old friends for help. The life insurance and annuity business still receive favorable tax treatment on earnings, with the only limitations on deposits being affordability or underwriting.

You just can’t put everything there, nor would it be wise to do so, but this may be a consideration depending on your individual circumstances.

Life insurance offers the following benefits (just in case you forgot!):

• Income tax-free death benefits to beneficiaries

• No defined annual IRS limitations on premiums

• No limit on gross income or modified gross income to affect your ability to contribute

• Missed premiums may be “made up” at a later time

• Tax-deferred accumulation

• Distributions using loans and withdrawals are income tax-free when structured properly

• No 10% penalty tax for accessing cash values prior to 59 ½ if structured properly

• Take distributions when needed, if at all

• No required distributions (RMDs) for owners

All signs point to changes in some aspects of IRS rules regarding IRAs, such as RMD on ROTH IRA and a ceiling on accumulation values in IRA accounts, sometime in the future.

Give us a call to schedule a discussion with a Szarka advisor about how this option, and others like it, may help your retirement planning diversification.

Watch Out Baby Boomers it’s Time to Begin Taking Your RMD

It is estimated that over the next 18 years about 10,000 people a day will turn 70½. This will create a potential windfall for the Treasury Department, because these distributions are taxable at the highest marginal income tax rate.

Why are people being forced to take distributions?
IRAs and other retirement plans were not designed to allow people to transfer wealth or leave an inheritance. They were created to provide income during an individual’s retirement years.

The initial wave of Baby Boomers who were born in the first half of 1946 must begin taking their required minimum distributions (RMD) as of July 1, which are distributions from their retirement accounts held in IRAs, 401(k)s and similar plans. That’s because those born in January 1946 become 70½ in July of this year, and the distribution rules specify the latest the distributions may begin, without penalty, is April 1 in the year after turning 70½. Moving forward, annual distributions must be taken by December 31 each year in order to avoid a 50% penalty on the amount they failed to withdraw.

What happens if you wait until April to take the first distribution?
While April 1, 2017 is the latest time to begin distributions for those turning 70½ this July, it is usually advisable to take the initial distribution no later than December 31. If one waits until next April, then both the 2016 and 2017 distributions must be taken in 2017 and that may cause some additional income tax and other costs for the taxpayer.

That may not sound like a big deal, but one of the repercussions of taking two distributions in the same year is that it may increase Medicare premiums related to the higher reported income. Those higher premiums are then locked in for the next year.

Missing the April 1 deadline or not taking out the full distribution amount required can also be costly. There is a 50% excise tax on any amount that one fails to withdraw. For example, if you were required to take out $1,000 and you failed to meet the deadline, it’s a $500 excise tax penalty. That also means that the $1,000 is added to your ordinary income on which you are taxed. If that tax rate is 15%, then that means you will need to pay an extra $150 in income tax. So you could end up paying an extra $650 in taxes because you missed taking the $1,000 distribution on time.

Do I have to take the distribution from a specific IRA?
You can take your distribution from any one of/or combination of your qualified retirement accounts, as long as you take out the entire amount required for that tax year.  For example, Fred has 5 IRAs and the total value is $250,000. His RMD on those accounts would be approximately $8,000. Fred can elect to have that $8,000 come out of just one of his IRAs or he can spread it out across any combination the five different IRAs, however he chooses, as long as he meets the full amount of the RMD.

What if I am still working?
“If you are still working at 70½, you don’t have to take a distribution from your current employer’s 401(k) plan until you leave your job. Although you cannot contribute to a traditional IRA once you turn 70½, you can continue funding a 401(k) plan if you keep working beyond that age (unless you own 5% or more of the company). However, once you stop working, you must begin your annual required minimum distributions and can no longer fund your employer-based retirement plan,” says Mary Beth Franklin, contributing editor to InvestmentNews.

“If you have multiple 401(k) plans, you must calculate a separate required minimum distribution from each employer plan and you must take a distribution from each plan each year once you turn 70½.”

The most recent tax law changes preserved the option for IRA owners who are at least 70½ to donate up to $100,000 per person to charity and avoid the taxes on the amount donated.

For married couples, each spouse can give up to $100,000 per person of their RMD directly to charity, with the exception of private foundations and donor-advised funds, which are not eligible. Any money that is donated will be excluded from taxable income, although it will no longer qualify for a charitable deduction.

One-Time Transfers to an HSA
“You may be able to make a qualified funding distribution from your traditional IRA or Roth IRA to your health savings account (HSA). The one-time distribution must be less than or equal to your maximum annual HSA contribution, and it must be made directly by the trustee of the IRA to the trustee of the HSA,” notes Franklin. “The distribution is not included in your income, but it cannot be deducted as an HSA contribution.”

If you are nearing 70½ and have questions regarding how to calculate your RMD, when to begin taking it or how you might be able to reduce your tax burden, why not schedule a time to sit down and review your specific situation.

Things to Consider About Paying Off Your Mortgage or Should You Rent and Not Worry?

Have you ever wondered if it makes sense to eliminate your home mortgage?

Did you think about the interest expense and try to justify it with a tax deduction? Have you considered how illiquid your assets are if your home equity is a significant part of your net worth? What is the opportunity cost of borrowing money to buy a residence? What could I do with the down payment instead of buying a residence? How much mobility is needed in your lifestyle? Will you be moving frequently? If you have a mortgage now and your investments aren’t earning more than the interest rate on the loan is it still a good idea to keep the mortgage?

So many questions but is there a correct answer? Simply put, probably not. Like so many facets of our lives one answer often does not materialize to make decision making easier. Over the last forty years I have discussed this issue in many meetings. There are formulas that can be worked to obtain present and future values of the variables involved.

To begin with, in my opinion, housing prices don’t always go up, inflation is not always covered by the appreciation in residential real estate, especially in Northeast Ohio. There was time when an encouragement to buy a house was that the payments on the mortgage would be made with dollars that decrease in value due to inflation and thus it wasn’t costing as much. We had many years where index returns in the major markets, S & P 500 being an easy one to cite, noticeably exceeded the APR on traditional fixed mortgages. If the S&P grew at 10% per year and your mortgage was fixed at 7% for 30 years the simple math would indicate that you should have been better rewarded for the investing surplus savings rather than increasing the down payment on the house, right? Doesn’t 10% exceed 7%?

This could be where it starts to become analytical. What is your effective tax rate? Let’s use 20% to help our discussion. If you are itemizing your tax return, that is using Schedule A when you file instead of just taking the standard deduction, then your effective, or after-tax interest rate could be 5.6% (7% x 80% = 5.6%), so in theory you only need to exceed 5.6% after-tax return on your surplus savings. There is a lot more involved, but for simplicity let’s just stay on this path. A 10% return on savings in a 20% tax bracket results in 8% (10% x 80%=8%) after taxes and 8% exceeds 5.6%, doesn’t it?

On the other hand, if your savings are producing minimal to negative yields should you redeem your mortgage? In the above example wouldn’t that be like making 7% on your money? It’s the rationale for paying off credit, right? Nobody likes to pay 14.95% interest, do they?

The discussion or argument for or against buying a home or paying off the mortgage early is very emotional in many respects. If you chose to rent and never buy what could that mean to you? In the later years of amortized mortgages your payment is mostly principal, right? The lenders make their money in the early years of amortized mortgages using the Rule of 78, so in the last few years it’s mostly principal being paid back. There are few tax advantages to be had at the end if tax deductions were why you justified buying a residence.

It’s the American Dream to own a house according to many. If you’re not sure what’s the right path, contact your advisor before you sign on the dotted line.


Tax Exempt Income May Still Result in You Paying Taxes

Uncertain when tax exempt income may be taxable? Many people are confused when it comes to tax exempt income.

Tax exemption means the income is excluded from being taxed. Because municipal bonds are one of the few ways that individuals can earn interest and dividends that are exempt from federal taxes, a lot of investors flock to them. But, what some people don’t realize is that while the tax exempt interest is and of itself tax exempt, the amount of that income is included in the calculation to determine what amount of their Social Security benefits may be taxable. So when people begin receiving their Social Security benefits, they will have to begin every year doing an additional calculation which will include tax exempt income, to help determine what percentage of their Social Security benefits may be taxed.

Another way that tax exempt income becomes taxable is for those whose income is over approximately $200,000 for individuals or $250,000 for couples. For those individuals or couples, their otherwise tax exempt income is now lumped together with their taxable income. They face the potential of a 3.8% Medicare surtax on the total amount of their income (i.e., taxable + tax exempt).

How might tax exempt income affect you?

To help determine what percentage of your Social Security benefits are taxed, tally up all of your income including wages, retirement income (i.e. pension income, IRA distributions, profit sharing distributions, basically anything that produces a 1099R), dividends, interest, capital gains, K1 distributions, and tax exempt dividends or interest. Depending on what that total is, the amount of your Social Security benefits that will be included in your taxable income will be determined using one of the two thresholds: 50% or 85%.

If you are a single filer of tax returns that have a combined income between $25,000 and $34,000 have to pay taxes on up to 50% of Social Security benefits. If your income is over $34,000, then up to 85% of your Social Security benefits are taxable. If you are filing married and jointly, and your combined income is $32,000 to $44,000, then up to 50% of Social Security benefits are taxable. If your combined income is more than $44,000, then up to 85% of your Social Security benefits may be taxable.

Are you still confused?

Give us a call and we can determine if your tax exempt income might actually result in an increase of your tax liability.

Do you still need life insurance, even if the kids have grown?

Most people are aware of the importance of having life insurance when they are raising a family. The untimely death of the family bread winner, especially when children are young, can have devastating effects on how the remaining spouse is able to continue to raise and educate the children. It is a story that is repeated time and time again as attested by all the television commercials.

As time passes there is another series questions to arise. If my kids are now out of the house, my debts are under control, the house is paid off, and retirement is around the corner, why do I need the life insurance? Can’t I stop the premiums and spend the money on something else?

The short answer is yes. You’ve made it through the maze of life, you’re looking at the downhill slide and all things are good. Yet, as the infomercials exclaim, “But wait, there’s more!”

Let’s take a different look at life insurance, not as a safety net, but rather as a tool to help accomplish other things.  For instance, do you have charitable gifting in mind? Did you know you can buy life insurance and the premiums become tax deductible for charitable purposes? Under this scenario at your death the charity receives the death benefit. This allows you and the family to become a benefactor of the church, charity or foundation of your choice.

Another reason to have life insurance is for the tax benefits. If one of your objectives is to reduce your taxable income, then tax free distributions from life insurance may be a solution for you. Did you know that you could use life insurance to help defer income and then convert it into non-taxable income to help offset the 3.8% Medicare tax on investment income? Additionally, there are ways in which you can use life insurance to limit taxes on your social security benefits.

Since the estate tax in Ohio is no longer applicable and the federal estate tax has been eliminated on estates below $5 million, it would seem the use of life insurance for estate transfer costs isn’t as necessary as it once was. However, can you think of a more cost efficient way to shift wealth? Depending on your situation, there may be benefits to having an Irrevocable Life Insurance Trust (ILIT) to accomplish your family’s financial goal.

If you are the owner of a business then you may have already had a discussion regarding a funded buy/sell agreement as a way to assure a more appropriate exchange of value than might be provided by a probate court. If not, then why not consult with your advisor to discuss the advantages of a funded agreement? I just recently advised a client on the benefit of such an agreement as it relates to his family, now that he is experiencing some severe health issues.

Life insurance has moved a long way from the days of the agent stopping by the house to collect weekly premiums. There are many ways in which life insurance can be used as a tool within an overall financial plan. Ask you advisor how life insurance can help you accumulate money, save on taxes and generate a better return on your savings and investments.

Will Your Pension Plan be There When You’re Ready to Retire?

Most people today acknowledge the change in retirement options. The days of the company sponsored pension plan began disappearing thirty years ago with the change in economics and demographics.

It’s no longer a longevity issue alone for current and future retirees as Congress weighs more requests to alter the pension landscape. According to a recent newsletter from National Retiree Legislative Network (NRLN), a provision in H. R. 83, signed into law by the President in December 2014, sets in motion new ways for plan sponsor to de-risk or remove pension obligations promised to workers and retirees.

We’re all familiar with stories of financially weak companies allowing plans to fall below a 90% funding level needed for solvency of the plan. This underfunding leads to freezing of benefits or conversions from defined benefit to defined contributions and shifting the onus to the plan participant—the employee. If insolvency of the sponsoring company is realized and bankruptcy ensues the plan may be terminated and then the Pension Benefit Guaranty Corporation (PBGC) assumes the risk.

De-risking of plans has been accomplished over the last several years in three significant ways. One way is for the plan itself to alter the mix of the investment portfolio by reducing equity holdings and substituting fixed income, or theoretically lower risk securities. This may be done as a way to prevent a ratings drop in the company’s bond rating, which in turn could lower stock values. Lower stock prices could then affect executive bonuses. Can’t have that now, can we?

Another way to reduce plan liabilities is to remove participants and that is done with Lump Sum Pension Buyout offers. The net effect of that is to transfer the risk to the employee and off the books of the pension plan. Why did you think the plan sponsor was making the offer? Lump sum offers may leave the plan less funded for those who didn’t, or couldn’t, take the offer. This may also affect surviving spouses as well. That is one reason why the spouse must sign off on the paperwork to complete a lump sum distribution.

The plan may also choose to purchase an annuity to assist with the de-risking of the plan. Once issued the annuity becomes a liability for the issuing insurance company. This would remove the plan from PBGC protection as well.

Lastly, H.R. 83 contains an amendment to ERISA rules and opens up a potentially dangerous precedent to allow for reductions in benefits to existing retirees where plans are underfunded. Have you seen the stories emanating from Detroit and Chicago regarding this very issue?

Don’t fall into the trap of asking coworkers for their advice. That may not be the best option for your specific situation. I suggest you review what’s going on with an advisor now so you are prepared to protect your retirement assets and income in case you are contacted by your pension plan administrator.

There are usually tight deadlines to respond to their communications. Being prepared with what options to choose once you do receive a letter will help make the process less stressful.

Feel free to give me a call if you have any questions or would like to begin planning now for what may happen with your plan at some point in the future.


What Plans Do You Have for Long-Term Care?

When my father passed away in 2013, my brother and I realized that my mom was not going to be able to continue to live in our family home and take care of herself on her own.

We had the agonizing process of having to find a new home for her, a place that we knew would be best suited to her mobility and medical needs. After many hours of discussion with my brother, and numerous tours of facilities in the area, we settled on a facility that wasn’t too far from either of our homes. I know that my brother and I are not alone in having to face the dilemma of deciding on long-term care options for a loved one. Maybe you are finding yourself in the same situation now, or perhaps you are beginning to have concerns regarding your parents or another family member. Industry statistics indicate that approximately one person in six will spend time in a skilled nursing facility, with the average stay ranging between eighteen months and four years. What are your options? How do you prepare ahead of time for all the various possibilities?

You may never need care, but what if you did? How would that affect your family? Many baby boomers are unwilling to face the possibility of something that they think may never occur. If you do need care, how will you pay for it? There are three possible answers to the question.

Medicaid: Relying on some form of government assistance, such as Medicaid, will require becoming impoverished in the eyes of the government. The look back period for Medicaid is currently 5 years, but that could change at any time, especially with the constant budget maneuvers in Congress. Some may be eligible for assistance from Veteran’s Affairs, if they quality, but there is a means testing to that as well.

Long-term Care/Nursing Home Insurance: Purchasing Long-term Care/Nursing Home insurance has been an option since the 1970s, when Fireman’s Fund Insurance pioneered the category of long-term care. The fact that Fireman’s Fund no longer exists is a testament to the difficulty insurance companies have in properly pricing their product and maintaining the reserves necessary to fund the liabilities. Until about twenty-five years ago, the options for obtaining coverage were limited to annual premium type policies. You could pick coverage with different benefit periods and different deductible periods. The policies were either reimbursement or indemnity benefits, with some offering return of premium. The return of premium option existed because people wanted a choice to get their money back if the insurance wasn’t used. That’s understandable, isn’t it?

It is not uncommon for insurance companies today to make available coverages funded with a lump sum of money. A key feature of this type of coverage is the beneficiary option, in the event the insurance is not used, and there are several providers offering this type of coverage. Some are only available with after tax dollars, while others are available for use with IRA dollars. It is always a good idea to examine all your options when considering funding potential coverage for long-term care. Keep in mind that newer policies which are compliant with the Pension Protection Act, allow distributions from long-term care to be tax free if used for long-term care costs. This can be a significant savings.

It can sometimes feel daunting to wade through all the variables and possible options when it comes to handling long-term care needs, concerns and expenses. Whether you decide to pay for potential expenses out-of-pocket or would like to investigate insurance based solutions, please contact me to assist you with your decision-making process.

Required Minimum Distribution: IRS’s Reminder That You’re 70½

As the saying goes, all good things must come to an end at some point.

Unfortunately that includes the tax deferral you have received after years of delaying income tax on contributions to your 401(k) and IRA qualified retirement accounts.

Distributions from these qualified accounts are required after age 70½ and are taxable. These payouts are called required minimum distributions (RMD), and are the smallest amount of money Uncle Sam will require you to withdraw from your retirement accounts each year, beginning April 1 of the year after you turn 70½. You will then have to take withdrawals by Dec. 31 for each ensuing year.

What retirement accounts do Required Minimum Distributions apply to?

• 401(k), 403(b), 408, 415 and 457 retirement plans
• Traditional IRAs
• Pension and profit sharing plans
• Inherited beneficiary qualified accounts

Although Roth IRAs are an exception, as you will not be required to take RMDs from a Roth IRA during your lifetime, your beneficiaries will be required to meet RMD rules. This is because IRAs are intended to be retirement plans, not wealth or estate transfer vehicles, so the IRS wants their share of the taxes once you are gone.

How are RMDs calculated?

RMDs are calculated annually, by dividing your traditional IRA or retirement account balance by your life expectancy. The December 31 balance of your accounts is used to determine the distribution to be taken the following calendar year. This is in part why you receive a Form 5498 midway through the year showing December 31 balances from all your retirement accounts.

Your distribution must be taken by December 31 except for the first year when it may be as late as April 1 of the year after you turn 70 ½. You can always withdraw more than required, however, if you fail to take at least the RMD for any year (or if you take it too late), you will be subject to a federal penalty, which is up to 50 percent of the amount that you were supposed to withdraw.

How do I calculate my RMD?

The Required Minimum Distributions rules can be extremely complex, especially in regards to inherited IRAs, as they affect you, your spouse and your beneficiaries, so give us a call at 440-779-1430 so we can assist you in determining your RMD.

You will want to make sure to consult with your advisor, tax professional or estate planning attorney. They will be sure to comply with the IRS rules, so that you do not incur a penalty, or worse yet, outlive your income.


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How to Properly Care for an Elderly Parent

I recently experienced how frustrating the process of helping an aging parent through the bureaucratic nightmare of transitioning can be, after the loss of a spouse. About a year ago my father died. Calls were placed to various organizations to make proper notification. One of the calls went to the provider of Medicare Supplement Insurance. Almost a year later the premium for both of my parents continued to be deducted from my mother’s checking account.

I placed a call to the insurance company, or more specifically the sponsoring organization, to question why the premium was still being charged. After several transfers and redials I was able to obtain assistance to resolve all the months of overpayment, in the form of more paperwork to be completed, including the need to submit a death certificate, a copy of the Medicare card, a copy of Form DD 214 proving honorable discharge from military service, and proof that I can act on behalf of my parents.

The moral to the story is simple. Begin working to help aging parents or a loved one transition into the next phase of their lives well before the time comes that they need to make these changes.

It is not uncommon for changes to occur suddenly, with no apparent warning. Many things need to happen when it’s time to move a parent or loved one into an assisted living facility or nursing home. There are a number of tasks to be accomplished to make this next step in family living go as smoothly as possible. But are YOU really prepared for when that transition may happen? Have you had the conversation with your parents yet about WHY this will need to be done, and HOW it is going to be done? It’s critical that you discuss with them and are in agreement on these issues, especially before they begin experiencing any decline in mental function, or worse, before one or both become deceased. I fortunately had discussed these issues with both parents prior to my father’s death, and also completed the power of attorney form required to allow me to act on my parent’s behalf.

But what if you are finding yourself in this situation now, what do you need to do? The list of things that need to be done may be rather extensive and you probably feel overwhelmed. Near the top of the list of items to be done is making sure you have pulled together Medicare information, Medicare Supplement information, and if applicable, any Veterans’ Administration benefits information, as well as to notify these organizations when a parent has a change in health or is deceased. In addition, have you gathered all other pertinent information related to your parents finances, health and insurance? Do you have it stored in an easily accessible format? Do you have the phone number for the attorney? Primary care physician? Financial advisor? Insurance advisor? Involved family members?

Are all pertinent documents current and signed? Beneficiary Forms? Health Care Powers of Attorney? Financial Powers of Attorney? Physician’s directives? Wills? Trusts?

When and where will care be given? What time of care is to be provided? How will the costs of services be paid? Is there long-term care insurance? One can see why it is so important to have these conversations with your parents before they begin to experience a decline their health or mental function.

I have helped many of my clients and their parents through this process of preparing for the next stage of life, as well as helping sort out the details and next steps as changes occur. Many times just having a neutral third party to assist with discussing these sensitive issues ahead of time has helped children of older generations who are not used to sharing their financial situation with their children.

If you have any questions, need assistance with this process or would like help in finding an attorney who can prepare estate planning documents and help with elder care issues, feel free to give me a call.


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New Year, New IRS Rules and Regulations

It wouldn’t be a new year if there weren’t changes put forth by the IRS. Now that tax season is in full swing, its time to take a closer look at what changes may affect you. With every change of the calendar year, the Internal Revenue Service (IRS) likes to add to the ever increasing complex world of tax rules and regulations. Let’s take a closer look at some of the things that may affect your tax situation.

The good news is, unless you have taxable income in excess for $400,000, you really are not going to see much change in the tax brackets for 2014. But if your Modified Adjusted Gross Income (MAGI) exceeds $250,000, then you will more than likely have to deal with the net investment income tax from Medicare.The Medicare taxes that went into effect for 2013 aren’t indexed for inflation, so they will remain the same as 2014.Remember, the Medicare tax is increased 0.9% for WAGE income above $250,000 for married filing jointly. In addition, there is a 3.8% Medicare contribution on net INVESTMENT income (NII), if your MAGI exceeds $250,000 for a married couple filing jointly. As usual those amounts are adjusted for single filers, and married filing separately.

NII applies to unearned income such as dividends, capital gains, royalties, rent and business income in which the taxpayer does not actively participate. What can you do to not get hit too hard by this Medicare surcharge?

Fortunately, there are ways in which to avoid this Medicare surcharge. One way is by looking for additional ways to defer your investment income. These new IRS rules & regulations spell out how you are to help fund Medicare from all your income sources, but that doesn’t include anything from within your non-qualified life insurance and annuities (those policies held outside of a retirement plan). The life insurance industry has been able to keep the inside accumulation of cash values from being taxable income. Which means that sometimes things that are considered old investment strategies, may need to be looked at as a possible new option to help avoid these Medicare surcharges.

It is always important to consult your accountant regarding your specific tax situation, but this may also be a good time to discuss with your financial advisor if non-qualified life insurance and annuities investment vehicles may be appropriate for you.


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