Need a Tax Deduction Now? Set Up a Charitable Remainder Trust
If you are in one of the higher tax brackets and seek a substantial tax deduction now, you may want to consider establishing a charitable remainder trust. This is an arrangement that can allow you to gift a highly appreciated asset to a charity of your choice. Then the charity can sell the asset and pay no taxes on the sale. This means both an immediate tax deduction for you based on the value of the item donated, and an additional tax savings from not having realized the capital gain on the sale of the asset. But there are additional benefits to this arrangement. As the donor, you will be entitled to receive a stream of income generated by the proceeds from the item donated. While you must receive income equal to at least 5% of the value of proceeds per year, more can be taken if necessary when stipulated at the inception of the trust. But charitable remainder trusts provide a golden opportunity for you to convert highly appreciated assets into an income stream with beneficial tax consequences.

But there are additional benefits to this arrangement. As the donor, you will be entitled to receive a stream of income generated by the proceeds from the item donated. While you must receive income equal to at least 5% of the value of proceeds per year, more can be taken if necessary when stipulated at the inception of the trust. But charitable remainder trusts provide a golden opportunity for you to convert highly appreciated assets into an income stream with beneficial tax consequences.

Of course, the charity also benefits from this, as it will receive the remaining principal from the sale of the asset once you are gone. If you have been considering making a substantial donation to a specific charity, a charitable trust will allow you to do so in the most tax-advantaged way possible. There are several different variations of charitable trusts available, such as remainder trusts, lead trusts, and uni-trusts. The traditional remainder trust pays out income now to the donor, while a lead trust lets the donor keep the principal for now and pays out income to the charity. In the case of the lead trust, the asset can revert to the donor's heirs. There are also differences in how the income is paid out; for example, some trusts will pay out a set percentage of the settlement proceeds each year regardless of whether that dips into the principal, while others will only pay out the interest generated by the trust proceeds.

If you would like to know more about how a charitable remainder trust could benefit you as a potential tax reduction and income generation tool, please contact us. We can help you determine which assets would be most beneficial for donation and help establish the trust arrangement with your beneficiary.

Don't Like the Tax Bill You Received This Year? Check Your Social Security Income
When you filed your income taxes this year, your tax bill may have unpleasantly surprised you. And if this is the case, you are by no means alone. There can, of course, be many reasons why your taxes could be higher than you expect, such as having to report a capital gain or taking a lump-sum retirement plan distribution. But one of the major culprits of this problem can, perhaps surprisingly, be the income you draw from social security. When social security began back in the thirties, it was originally slated as tax-free income and remained so until 1984. However, over the years, Congress has enacted legislation that has eroded this tax-free status. The general parameters for the current taxation of social security are broken down as follows:

Income levels requiring taxation of social security income

Once your income respective to your filing status reaches these levels, then 50 to 85 percent, respectively, of your social security income can become taxable. This can quickly have a substantial impact upon your tax return, as many Americans receive up to $20,000 of social security benefits per year. Furthermore, very few recipients have any tax withheld from this income, as most believe that they will not be taxed on it. But even a modest pension income can make a large amount of your social security benefits taxable. For example, if you are single and you draw $15,000 a year from a company pension, and you also receive $16,500 in social security benefits, then nearly up to 85% of your benefits are subject to taxation. Mathematically, that comes out to around $14,000, resulting in a possible tax bill of $2,100 – assuming an effective tax bracket of 15% federal. And, of course, if you have additional investment income of any kind from bonds, CDs, or mutual funds, then that will increase your taxes as well

The good news is that, for many Americans, there are ways to either eliminate or greatly reduce their tax bills. One of the key methods to achieving this is by moving taxable fixed-income assets into tax-deferred fixed annuities.¹ This effectively allows the taxpayer to only pay tax on the actual taxable portion of each distribution, and not on the interest that is still compounding within the annuity. With taxable CDs or other fixed income investments, all interest is taxable, whether it is paid out or not. This income can, therefore, also increase the taxation on your social security benefits.

If you are concerned about the amount of tax that you are paying on your social security or other income, call us to show you how you can potentially pay less or no tax on your social security.

How Much Will You Have in Your IRA When You Die?
Here’s how you can forecast the future value of an IRA. If you restrict your withdrawals to the minimum required distribution (MRD), we can help give you an idea. We will assume that you make it to age 85 and you are the owner of your IRA – and that you will withdraw your yearly MRD every year starting at age 70.

The amount withdrawn each year for your MRD is simply the value of your IRA at the end of the preceding year divided by the Internal Revenue Service's distribution time for your age.² The distribution times come under the IRS’ life expectancy tables. Only Table I is a life expectancy table for a single individual. It is used for beneficiaries. Table II is a joint life and survivor expectancy – used for those married with a spouse more than 10 years younger.

As a single owner or married with a spouse not more than 10 years younger, you will use Table III – the uniform lifetime table. This distribution time each subsequent year, reduces – usually by about 0.8 years (not by one year)! So each year, you will be dividing by a smaller number. This means you will be taking out a somewhat larger fraction of your IRA holdings each year.

Of course it is the government's idea to get you to deplete your IRA, so they can get the tax payments from you that you did not pay them when you deducted your contributions – and/or earned tax-free as your IRA grew over time.

Based on Table III (Uniform Life) your distribution time is 27.4 years when you are 70 years old. That distribution time is generously greater than your actual life expectancy at 70. This IRS table does not represent a true life expectancy – but a devised one for IRA distributions. The Center for Disease Control (CDC) tabulates³ life expectancy and shows that at age 70, you have a 50/50 chance of living to about 85.

With this in mind -using Table III for distribution times – we can consider the figure shown. It shows how the value of your IRA changes with your age if you withdraw only the annual MRD starting at age 70. The age-dependent value of your IRA is given for three different annual growth rates of 3%, 5%, and 7%. The plot is based on $10,000 initial value, and is scalable for any multiple of this. You can see that any growth rate over 4% will cause your IRA to increase despite your MRD withdrawals in the early years. Of course if you live long enough, you will almost deplete it – but that is highly improbable.

The example shown is strictly hypothetical and is not representative of any actual investment, and the illustration shown does not reflect the deduction of fees and expenses that would apply to an actual investment and reduce the amounts shown.

The vertical line represents your life expectancy if you make it to 70 – the one that projects living to about 85. If you die at age 85, you can see that you may have a significant amount of value left in your IRA.

Give us a call or fill out the reply coupon so we can help you find the right investment for your IRA.

When is a Rollover Not a Rollover?
The IRS will let you take money from an IRA, hold onto the funds for 60 days, and put it into another IRA without paying any tax or penalty on the transaction. If you do not complete the rollover within the 60-day window, the withdrawal becomes a taxable event. Plus if you have not reached age 59^1/2, you could face a 10% penalty.⁴ Fairly simple rule to follow, right? Well, not exactly, since there are a few lesser-known details that, if ignored, could cost some IRA owners or beneficiaries a lot of money.

Investors have been known to run afoul of the “same property” rule, which is within the IRS’ rollover regulations.⁵ This law states that a rollover from one IRA, or qualified retirement plan, to another IRA can only consist of the same property. For instance, you cannot take cash payment from a 401(k), buy stocks, and then roll the stocks over to your IRA.

If you did that, the IRS would consider the cash distribution from the 401(k) income subject to taxes at the current ordinary income rate. Plus you might have to pay any applicable penalties. Instead, for the above example, you would have to deposit cash in the IRA in order for the transaction to be classified as a tax-free rollover.

Another potential problem can surface for IRA beneficiaries.

Only spouses can roll over an inherited IRA into their own IRA. But they are not under any obligation to do so.⁶ It can be done anytime - which allows flexibility for a survivor.

The surviving spouse can move the funds in two ways: (1) withdraw the deceased’s IRA and deposit in his/her IRA within 60 days or (2) directly move the funds via a trustee-to-trustee transfer.

Non-spouse beneficiaries, including trusts, cannot do IRA rollovers. Therefore; they cannot use the 60-day rollover rule. And this is where they can get into trouble.

For example, suppose that your son is your IRA beneficiary. After your death, he decides to roll over the money to his own IRA. So he receives a check from the IRA trustee with the intention of depositing it in his IRA within 60 days. Shortly after getting the money, he receives a Form 1099-R from the IRA trustee notifying him of a taxable distribution. He tries to get the transaction reversed but cannot and is now forced to use 35% of his inheritance to pay the income taxes because of the error. I always recommend investors consult with their own qualified tax and financial advisors prior to making any investment decisions.

For help in transferring or rolling over money from your retirement plan or IRA, contact us.

Which Source of Funds Comes First – Taxable or Qualified?
When it comes time to tap your savings and investment accounts, clients often wonder which source should come first. In general, many experts advise investors to draw from their taxable accounts first, and then tap qualified accounts such as IRAs and 401(k) s further down the road. There is a logical reason for this – prolonging withdrawals from your qualified accounts gives these assets additional time to grow with the benefit of tax-deferral. There are other reasons why this strategy could be efficient from a federal income tax perspective.

Let’s say that you have three sources of investment funds, a regular taxable account (which could hold individual stocks, bonds, or mutual funds) and two qualified accounts: a traditional IRA and a Roth IRA. What happens if you tap your traditional IRA? First, all withdrawals from a traditional IRA are taxed at your current income tax rate. Second, a 10% federal income tax penalty will usually apply to traditional IRA withdrawals taken prior to age 59^1/2 (subject to a few limited exceptions explained in IRS Publication 590. Exceptions include but are not limited to: withdrawals for qualified higher education expenses, first-time home buyers, medical insurance premiums for certain unemployed taxpayers, and withdrawals taken by disabled taxpayers).

What about taking money from a Roth IRA? First, your principal contributions from the Roth can be withdrawn without incurring any tax. Additionally, any withdrawals from your Roth are first treated as being taken from your principal. Should you have to tap into your earnings, these withdrawals are subject to ordinary income taxes at your respective tax rate. If you are less than 59½ years of age, or you do not hold the Roth for more than five years, the distribution could also be subject to the 10% federal income tax penalty. By leaving the money in the traditional and Roth IRAs, you have the opportunity to accumulate tax-deferred investment growth over the life of both the owner and the beneficiaries. Assuming the age and holding period requirements are met, all Roth distributions also come out free of future federal income taxes to the account owner, as well as the beneficiaries.

What if you tap your taxable account first? You will owe taxes on any capital gains you realize from the sale of investments in this portfolio. Assuming you have held the asset for more than one year, your rate will be lower than your current income tax rate (5% for taxpayers in 10-15% brackets; 15% for all tax brackets exceeding 15%). You might also be able to offset any capital gains with capital losses, which can soften the blow of your annual tax bill. As you gradually tap your taxable account, the distributions you receive from these investments will slowly recede, thus lowering your tax burden from dividends and capital gains paid to you. Moreover, your qualified accounts could potentially have longer time to grow with the power of tax-deferral, which could enhance the value of your qualified retirement funds.

Eventually, you will have to take minimum distributions from your traditional IRA once you reach age 70^1/2. Although these distributions will be taxed at your ordinary income tax rate, you could be in a lower tax bracket by then. As previously mentioned, these distributions are taken, in many cases, over the life expectancies of the owner and the beneficiaries. On the other hand, traditional IRAs do not receive a step-up in income-tax basis when they are transferred to younger beneficiaries at the owner's death. Although there is something to be said about the power of deferring taxes, one should also consider future income tax consequences to younger family members before making a decision.

Assuming you have assets in Roth IRAs, you should know that minimum distributions are not required. In view of this and the fact that withdrawals will come out free of federal income taxes (assuming the age and holding period rules are met), you may want to consider your Roth assets as your source of last resort.

Deciding which account to tap first depends on your financial and tax situation now and during your retirement years.

If you would like to review some withdrawal strategies for your various investment accounts, please contact us.

Collect Social Security Based on an Ex-spouse’s Work Record
Yes, it is true: If you are divorced, and do not qualify for very high Social Security benefits because you were a stay-at-home spouse, you can potentially collect a Social Security benefit based on your ex-spouse's work record – depending on the circumstances, of course. Do you qualify?

Let’s say you stayed home with your children while your spouse worked. After 25 years, you divorced, and you re-entered the workforce. You are now near retirement age, and you either have not accumulated enough credits to qualify for Social Security yourself, or you have not accumulated as many as your ex-spouse has.

In a case such as this, you may qualify for Social Security benefits based on your ex-spouse’s work record. Typically, those benefits would be equal to half of your ex-spouse’s benefits at his full-retirement age. And in most cases, anything you receive based on your ex-spouse's work record will not affect his or her benefits.

Of course, there are some caveats. Your marriage must have lasted at least 10 years. Your ex-spouse must be at least 62 years old, and must be collecting or eligible for Social Security benefits. And, you must be at least 62 years old and unmarried. Moreover, you can only collect the full benefits you are owed, based on your ex-spouse's work record, if you wait until your own full-retirement age to start taking benefits; otherwise your benefits would be reduced.

Applying for Social Security benefits based on your ex-spouse’s work record can also get tricky. First you will have to apply for benefits based on your own work record (assuming you have worked a total of 10 years or more, the minimum to qualify for Social Security benefits). That’s because where the money comes from will depend on how much you are owed versus how much your ex-spouse is owed. For example, if you are entitled to $500 based on your own earnings, and $1,000 based on your ex-spouse’s earnings, you would still get $1,000 a month – but $500 would be based on your own record and $500 on your ex-spouse’s.

Call me to request some additional information.

Be Sure You Understand These Key Terms in Your Insurance Policies
When you purchase insurance - life, health or disability - you are obviously interested in maintaining it until you feel that you do not need it anymore. You should understand some key terms pertaining to insurance that have a direct bearing on maintaining your policy and reaping its proceeds. Seniors suffer an increasing probability of health problems as time goes on, so understanding policy implications to these are critical. Four terms of particular importance to them are:

• conditionally renewable,
• renewable,
• guaranteed renewable, and
• " non-cancellable.

A conditionally renewable policy means that you can renew your policy - but subject to the insurer's conditions. Here, the insurer can cancel your policy if you have made too many claims or, for some reason, appear to be a higher risk. Under such a condition, an insurer can drop you when you need the coverage most. As an example, if you paid on a conditionally renewable health insurance policy for 20 years without filing many claims, your insurer can drop you when you turn 60 or 70 – right when you are likely to need more medical services.

A renewable policy allows the beneficiary to extend the coverage term for a set period of time without having to re-qualify for coverage. It is contingent on premium payments being up to date. A life insurance contract having a renewable term clause would be beneficial, since future health circumstances are unpredictable. Although the initial premiums are likely to be higher than those of a life insurance contract without a renewable term clause, buying this type of insurance is often in the beneficiary's best interest.

A guaranteed renewable policy prevents the insurer from unilaterally dropping you, as long as you keep paying your premiums on time. Virtually all health insurance policies written today are guaranteed renewable. While re-insurability is guaranteed, premiums can rise based on the filing of a claim, injury, or other factor that could increase the risk of future claims. Premiums can also be raised on an entire class of insured people during the life of a guaranteed renewable policy for health, life, or disability insurance.

Most insurers offer both guaranteed renewable policies and non-cancellable policies. If premiums are similar for both a guaranteed and a non-cancellable policy, the non-cancellable policy will offer the double guarantee of re-insurability and locked-in premiums.

Give us a call so we can find the type of insurance policy suitable to your situation.

HSAs Can Offer Substantial Savings Benefits
If you do not qualify for group health insurance and are not drawing on Medicare, then you are probably eligible for an exciting new health savings plan that can double as a retirement savings vehicle. Created in 2003, these self-directed plans are called Health Savings Accounts (HSAs). They allow for annual tax-deductible contributions that can be invested in stocks, bonds, mutual funds, annuities, or virtually any other type of investment vehicle.

However, unlike IRAs or other types of retirement plans or accounts, you can withdraw the money from your HSA at any time (including before age 59½) in order to cover the cost of any type of qualified medical expense. “Qualified expenses” for HSAs include virtually any type of medical expense, including doctor’s visits, hospital bills, lab fees, dental work, eyeglasses, medications, hearing aids, long-term care, etc.

But if luck is with you and no medical bills are incurred, or the amount spent on medical expenses is less than the account balance, then you can withdraw the remainder as retirement income. Best of all, there are no income or age limits for anyone wishing to make tax-deductible contributions, which are a huge benefit for high-income savers or those that also contribute to any other type of retirement plan. These plans do require the participant to be covered under a qualifying high-deductible health plan, which has a higher than normal deductible, and tends to cover only the more catastrophic health issues. However, traditional health plans require payment of premiums (which are often higher than qualifying high-deductible policies) regardless of whether a claim is made or not. Therefore, for those who qualify, these plans offer an advantage; the guarantee that the money they spend to cover medical costs will not go to waste, regardless of whether any medical bills are actually incurred or not. This feature effectively resolves a huge dilemma for those who are struggling with health or medical uncertainty, and are trying to decide whether to invest in more insurance or simply increase their liquid assets.

Furthermore, you will not have to itemize deductions on your tax return in order to get the contribution deduction. Ultimately, these plans offer an enhancement to the traditional retirement savings income limitations if you are attempting to maximize your retirement savings. The contribution limits are indexed for inflation and vary according to whether you are single or have a spouse or family.

If you would like to know more about Health Savings Accounts, please call us.

Note that health savings accounts may have associated fees.