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Retirement

Jun 24
0

It’s Annuity Awareness Month. How much do you know about annuities?

By | Financial Literacy, Retirement

Because June is Annuity Awareness Month, here is an overview about them.

Annuity product designs and types continue to evolve, primarily to meet the demands of people nearing retirement. In addition to their original purpose of providing retirement income, insurance companies have developed hybrid policies, adding features to address the multiple risks consumers face as they get older.

The most important thing you should know about annuities is that they are insurance policies, or contracts between you and an insurance company. Guarantees in them are backed by the financial strength and claims-paying ability of the issuing insurance company.

As with any contract, it’s important to read and understand the fine print before you sign, and you should compare policies from multiple insurance companies to find the best value. That’s where a good independent financial advisor can help.

Fixed Annuities

Fixed annuities are probably the easiest type of annuity to understand. (They are also the oldest—a simple form of the fixed annuity was originally created for Roman soldiers who grew too old to serve.) An insurance company will guarantee* a fixed interest rate on your fixed annuity contract for a selected term, usually from one to 15 years. You can usually purchase a fixed annuity with either a lump sum of money or a series of payments over time.

At the end of the contract term, you can take the money out, put it into another investment, or “annuitize,” meaning you can begin to take periodic payments over time to create income for retirement. This is called the “payout phase” of an annuity contract and it may last for a specified number of months, years, or be guaranteed* for as long as you live.

If you do choose to annuitize a fixed annuity policy, you can begin to receive periodic payments at once (called an immediate fixed) or you can wait until a certain age or time in the future to start receiving payments (called a deferred fixed).

If you purchase one of these annuities with non-qualified money (meaning you have already paid taxes on it), the interest in the annuity policy accrues on a tax-deferred basis. At the point where you take the money out of the annuity or begin taking periodic annuity payments, distributions are taxed based on an “exclusion ratio” so that you only pay taxes on the interest or gains.

If you purchase one of these annuities with qualified money, such as by rolling it over from a traditional 401(k) or IRA, distributions are 100% taxable, since you have not paid any taxes on any of the money yet. As with any qualified plan, if you take or withdraw money before age 59-1/2 you may owe additional tax penalties.

Variable Annuities

Variable annuities were developed in the 1950s. The best way to explain variable annuities is to compare them to fixed annuities. First of all, most variable annuities require a prospectus since part of your money will actually be invested in the stock market, called “sub-account investments.” That means that there is market risk involved with variable annuities, because you can either make money on the amount invested in sub-accounts, or you can lose it depending on market performance.

Variable annuities are usually purchased with the expectation that at some point the contract owner will annuitize or begin taking periodic payments. These are called deferred variable annuity contracts. (You can also purchase an immediate variable annuity contract.)

The important thing to understand about the variable annuity contract is that your periodic annuity payments may fluctuate based on stock market performance, depending on policy terms. And it’s possible that some variable annuity policies can lose principal due to stock market losses.

Variable annuities often come with a death benefit for your beneficiaries based on the contract terms, but some specify that there must be enough money left in the policy after annuitization payments have been taken out and/or will pay the death benefit as long as the sub-accounts have not lost too much money.

Fixed Indexed Annuities

Fixed indexed annuities were first designed in 1995. The biggest difference between them and variable annuities is that fixed indexed annuities are not actually invested in the stock market so they are not subject to market risk. With fixed indexed annuities, after you have owned the policy for a specified number of years your principal is guaranteed*.

With fixed indexed annuities, any policy gains are credited and then locked in annually, bi-annually or at specified points in time. The gains credited to the policy are determined by the insurance company based on the performance of a selected index (for instance, the S&P 500) or multiple indexes. Some fixed indexed annuity gains are capped relative to index performance, meaning you can only be credited a certain percentage, but some are uncapped.

Index performance is used as a benchmark for policy gains or periodic crediting and lock-in. With fixed indexed annuities, you have the potential to participate in market gains. And if the benchmark index loses money, your policy is credited with 0%, keeping the most current locked-in principal value in place.

Fixed indexed annuities can be purchased on an immediate or deferred basis. They can be purchased with qualified or non-qualified money. And they can offer a lifetime income option and/or a death benefit.

Other Things to Know About Annuities

*The guarantees provided by annuities rely on the claims-paying ability and financial strength of the issuing insurance company.

Annuities must be considered carefully based on your particular situation because they are not liquid. Almost all annuities are subject to early withdrawal penalties. Make sure you understand the contract terms and the type of annuity you are purchasing. Your financial advisor can help you compare and analyze policies.

This article is provided for information purposes only and is accurate to the best of our knowledge. This article is not to be relied on or considered as investment or tax advice.

Have questions about annuities? Please call us! You can reach Bulwark Capital Management at 253.509.0395. 

 

Apr 26
0

RMDs Are Back for 2021

By | Retirement, Tax Planning

RMDs, or Required Minimum Distributions, are withdrawals that are required by the IRS each year out of your traditional retirement accounts like 401(k)s and IRAs starting at age 72. The money that you have to take out annually by December 31st at midnight is taxed based on your income tax rate for that tax year.

Some retirees forget about RMDs when planning for retirement, and don’t realize how big the tax bite may be for them. This year, because of the pandemic, the CARES Act suspended the RMD for the 2020 tax year in an effort to help retirees avoid withdrawing money from accounts when the market was down.

(An RMD is calculated based on the closing balance of the account at the end of the previous year. When the markets drop significantly, the RMD represents a much higher percentage of a diminished portfolio and that reduces the ability to recover from big losses.)

In 2021, the RMD will be back. As an example, a 75-year-old man with a traditional IRA worth $100,000 will have to withdraw $4,367 this year.

Roth 401(k) Plans

Roth 401(k) plans, which are funded with after-tax dollars, are subject to the same RMD rules that traditional 401(k) and IRA plans are. The amounts are calculated using the same IRS life expectancy tables and account holders must begin taking them after they turn 72. (One exception is if you continue working after age 72 for the company that sponsors the plan and you don’t own more than 50% of the company.)

The difference is that Roth 401(k) withdrawals are usually not taxed.

You can avoid taking the minimum distributions entirely by rolling a Roth 401(k) into a personal Roth IRA, which is not subject to RMD rules.

2020 RMDs Without Penalty, But With Taxes

As part of the CARES Act, the IRS allowed COVID-related withdrawals from traditional retirement plans up to $100,000 without penalty in 2020 for those who were impacted by the pandemic. Income taxes were due on those withdrawals, which could be paid over a three-year period. Those who can afford to can pay the withdrawals back this year (or over a three-year period) can get the taxes back by filing amended tax returns.

Those Who Just Turned 72—It’s Complicated

The SECURE Act of 2019 raised the age when RMDs must begin to age 72. If you turned 70-1/2 in 2019, the old rules applied—your first RMD should have been due April 1st, 2020. However, because the CARES Act suspended RMDs, the new due date was April 1, 2021 for those individuals.

For retirees who turned 72 in 2020 or will turn 72 this year, you can take your RMD at any point in 2021, or even delay it up until April 1, 2022. But if you choose to delay it, you will owe two RMDs in 2022, which could put you into a higher tax bracket.

You should check with your tax professional before making decisions about RMDs, because there are strict rules about which accounts must be withdrawn from and stiff penalties for mistakes—to the tune of taxes owed plus an additional 50%!

 

To discuss your retirement plan, including RMDs, please call us. We are happy to discuss ideas with you and/or your tax professional. You can reach Bulwark Capital Management at 253.509.0395. 

 

This article is provided for educational purposes only and its content should not be relied upon for tax advice. As always, check with your tax professional or attorney for specific tax advice related to your situation.

Source:

https://www.cnbc.com/2021/03/01/required-minimum-distributions-on-retirement-plans-are-back.html

Sep 24
0
Roth Conversions

What is a Roth Conversion?

By | Retirement, Tax Planning

To understand what a Roth conversion is, you must first understand some of the basics about the different types of retirement accounts, called “qualified accounts.”

  • Pensions

Also called defined-benefit plans, pensions are paid for by employers. They have largely gone away for Americans in the private sector starting with the passage of three laws during the Reagan administration, the Tax Equity and Fiscal Responsibility Act passed in 1982, The Retirement Equity Act of 1984, and The Tax Reform Act and Single Employer Pension Plan enacted in 1986.

The lack of pensions is one reason why it’s important for people to create their own retirement income plans.

  • 401(k) Accounts

Defined-contribution plans, including 401(k)s and similar plans, rely on an employee to elect to contribute a percentage of their salary in order to save for retirement. Contribution amounts are usually taken out of an employee’s check on a “pre-tax” basis, and sometimes a company will add a “matching” amount based on the percentage the employee contributes, often based on an employee’s length of service.

A 401(k) plan generally has a limited list of fund choices. The maximum an individual can contribute to a 401(k) in 2020 is $19,500 per year, or $1,625 per month, not including the employer’s matching amount.

For traditional 401(k)s, no taxes are due on 401(k) accounts until the money is withdrawn. Ordinary income taxes are due upon withdrawal at the account owner’s current tax bracket rate, and withdrawals are mandatory starting at age 72. NOTE: Roth 401(k)s are available at some companies, and contributions for those are made on an after-tax basis.

  • Traditional IRA Accounts

An IRA—Individual Retirement Account—is a type of account which acts as a shell or holder. Within the IRA, you can invest in many different types of assets. You can choose between CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available. You can open an IRA account at a bank, brokerage, mutual fund company, insurance company, or some may be opened directly online.

For 2020, you can contribute up to $6,000 to an IRA, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. Traditional IRA contributions are typically made with pre-tax dollars, which gets accounted for on your tax return in the year you choose to make the contribution. Depending on your income level, sometimes traditional IRA contributions can also be tax-deductible. Traditional IRA withdrawals are treated as ordinary income and taxed accordingly, and withdrawals are mandatory starting at age 72.

  • Roth IRA Accounts

Like a traditional IRA, a Roth IRA is a type of account which acts as a shell or holder for any number of different types of assets. The difference is that Roth IRA contributions are made with after-tax dollars.

Withdrawals are not mandatory for Roth IRAs, but you can withdraw funds tax-free as long as you follow all rules, which include having the account in place for at least five years. Those age 59-1/2 or older can withdraw any amount—including gains—at any time for any reason, and can also leave Roth IRA accounts to their heirs tax-free—beneficiaries just have to withdraw all the money within 10 years of the account holder’s death.

For people under age 59-1/2, as long as they have had their Roth IRA account in place for five years or longer, they can withdraw any amount they have invested at any time—but not the gains or earnings. If they withdraw the gains or earnings, they may have to pay ordinary income taxes plus a 10% penalty on those, with some exceptions, such as first-time homebuyer expenses up to $10,000, qualified education and hardship withdrawals, which may avoid the penalty but still require tax be paid on any amount attributed to earnings.

Roth IRAs offer the potential for tax-free retirement income as well as tax-free wealth transfer to heirs. Essentially, with a Roth IRA, your interest, dividends and capital gains which accumulate inside it are tax-free as long as you follow all Roth IRA withdrawal rules.

For 2020, you can contribute up to $6,000 depending on your income, plus an additional $1,000 catch-up contribution if you reach age 50 by the end of the tax year. However, Roth IRAs have income restrictions that may disqualify higher-income people from participating. The income restrictions on Roth IRA accounts are not always a barrier to conversions—a perfectly legal tax strategy called a “backdoor Roth IRA conversion” can be accomplished as long as all IRS rules are followed.

Roth Conversions

Because of the many Roth IRA tax advantages, some people may benefit from converting some of the money in their taxable 401(k) and/or traditional IRA accounts into tax-free Roth IRAs. Conversions are a taxable event in the year they are done, and they cannot be undone, so it is important to work with a qualified advisor to run anticipated tax savings calculations to see if they make sense. Additionally, there are complex tax rules which must be adhered to in regard to the ratio of taxable to non-taxable amounts held in IRAs.

If you have a low-income year due to a job loss or cutback, or you are five to 10 years away from retirement, you may benefit from a Roth conversion, or a series of them at today’s lower tax bracket rates, set to revert back up to 2017 levels for the 2026 tax year.

There are basically three ways to do Roth conversions according to Investopedia:

1) A rollover, in which you take a distribution from your traditional IRA in the form of a check and deposit that money in a Roth account within 60 days.

2) A trustee-to-trustee transfer, in which you direct the financial institution that holds your traditional IRA to transfer the money to your Roth account at another financial institution.

3) A same-trustee transfer, in which you tell the financial institution that holds your traditional IRA to transfer the money into a Roth account at that same institution.

Whatever method you use, you will need to report the conversion to the IRS using Form 8606 when you file your income taxes for the year and follow all rules. Roth conversions are complex and you should seek expert tax guidance.

Let’s talk. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

This article is for informational purposes only and should not be used for financial or tax advice. Future tax law changes are always possible. Be sure to consult a tax professional before making any decisions regarding your traditional IRA or Roth IRA.

Sources:

https://protectpensions.org/2016/08/04/happened-private-sector-pensions/)

https://blog.turbotax.intuit.com/tax-deductions-and-credits-2/can-you-deduct-401k-savings-from-your-taxes-7169/.

https://www.nerdwallet.com/blog/investing/how-much-should-i-contribute-to-a-401k/.

https://www.debt.org/tax/brackets/

https://www.investopedia.com/terms/b/backdoor-roth-ira.asp#

https://www.investopedia.com/roth-ira-conversion-rules-4770480

https://www.kitces.com/blog/roth-ira-conversions-isolate-basis-rollover-pro-rate-rule-employer-plan-qcd/

Aug 18
0

How Rich Do You Have to Be in Order to Retire?

By | Health Care, Long Term Care, Retirement, Tax Planning

Even though perceptions have changed during the pandemic with more Americans now saying they need less money to feel rich1, when it comes to retirement, most people are still unclear about how much they will need to have saved before they can quit their jobs.

The answer to that question is different for every person.

Here are some of the things you need to think about in order to get a realistic retirement number in mind.

 

What do you want to do during retirement? Where will you live?

Different people have different retirement goals and visions. You may not realize that you need to answer lifestyle questions before you can answer the “how much do I need” question.

Think about it this way. A single woman downsizing into a tiny home in a rural community to enjoy hiking in nature is going to need to have saved up a lot less money than a couple who wants to buy a big yacht, hire a crew and travel around the world docking at various international ports. A man who wants to spend all his time woodworking in his garage in the Midwest will need a smaller nest egg than a power couple collecting art and living in a penthouse in New York.

Most people are somewhere in the middle of these extremes. Yet answering these questions for yourself is very important both financially and emotionally for everyone entering retirement. You don’t want to end up feeling lost or bored not working—you want to feel that you are moving forward into a phase of life that is rewarding to you. And you certainly don’t want to run out of money because you miscalculated.

Take some time to get specific about your needs and desires. Will you want to spend holidays with family or friends? Start an expensive new hobby like golf? Take a big vacation every year? (The pandemic will end eventually!) Visit your grandchildren who live across the country multiple times? Go out to eat every day?

Based on your goals and objectives for your retirement lifestyle, your financial advisor will help you prepare a realistic monthly budget, adding in calculations for inflation through the years.

Once you’ve developed your monthly budget, it can be compared against your Social Security benefit to give you a good idea of how much additional monthly retirement income you will need to generate from your savings. From there, your advisor can come up with strategies to help you create income from savings, and then give you a realistic figure that you will need to have saved up before you retire.

But in addition to your retirement lifestyle, there are a couple of other things that need to be considered.

 

How is your health?

Nearly every retiree looks forward to the day they can sign up for Medicare. But Medicare is not free; the standard Part B premium for 2020 is $144.60 per month2 for each person. Your premiums for Medicare are usually deducted right from your Social Security check.

If you elect to purchase additional coverage through Medicare Advantage, Medigap and/or prescription drug plans, your premiums will cost more. And there will still be deductibles to meet and co-pays you will owe.

Some estimates for health care expenses throughout retirement are as high as $295,000 for a couple both turning 65 in 2020!3

Even worse, keep in mind that this figure does not include long-term care expenses—Medicare doesn’t cover those after 100 days.4

 

Have you planned for taxes?

It’s not how much money you have saved, it’s how much you get to keep net of taxes.

When designing your retirement plan and helping you calculate how much you need to save, your advisor will take into consideration an important piece of the puzzle—taxes. Tax planning is often different than the type of advice you get from your CPA or tax professional when you do your tax returns each year. Tax planning involves looking far into the future at what you may owe later, and finding ways to minimize your tax burden so you will have more money to spend on things you enjoy doing in retirement.

Different types of accounts are subject to different types of taxation. “After-tax” money that you invest in the stock market can be subject to short- or long-term capital gains taxes. Gains accrued on “after-tax” money that you have invested in a Roth IRA account are not taxed due to their favorable tax rules. Interest paid on “after-tax” money in savings, CDs or money market accounts is taxed as ordinary income, although this usually doesn’t amount to much especially with today’s low interest rates.

What your financial advisor will be most concerned about is your “before-tax” money held in accounts like traditional IRAs or 401(k)s which are subject to ordinary income taxes when you take the money out, which you have to do each year starting at age 72 per the IRS. (These mandatory withdrawals are called required minimum distributions.)

If “before-tax” money like 401(k)s are where the bulk of your savings is held, you will want to run projections to calculate how much of a bite income taxes will take out of your retirement, especially since tax brackets will go back up to 2017 levels5 beginning in January of 2026. There may be steps you can take now to help you lower your taxes in the future.

 

Please contact us if you have any questions about your retirement. Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

 

Sources:

1 https://www.financial-planning.com/articles/americans-now-say-they-need-less-money-to-feel-rich

2 https://www.medicare.gov/your-medicare-costs/medicare-costs-at-a-glance#

3 https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs

4 https://longtermcare.acl.gov/medicare-medicaid-more/medicare.html

5 https://taxfoundation.org/2017-tax-brackets/

Jun 19
0

How COVID-19 Has Impacted Retirement Confidence

By | Retirement

The Transamerica Center for Retirement Studies recently conducted an online survey of more than 6,000 people in the U.S. and found that many are feeling financially vulnerable.

Americans are feeling a distinct lack of confidence, particularly when it comes to retirement. Whether employed or unemployed, the survey found that 23% of workers are no longer certain they can retire comfortably following the coronavirus pandemic.

Not unsurprisingly, the insecurity was highest for baby boomers, born between 1946 and 1964, who are closest to retirement—32% said their confidence in their ability to retire has gone down due to COVID-19. Meanwhile, 25% of Generation X, those born between 1964 and 1978, said their retirement confidence has declined, and 20% of millennials, people born between 1979 and 2000, said the same.

The research also uncovered the average amount that each generation has put away in savings toward their retirement years. While millennials have a median of $23,000 saved in all household retirement accounts, Gen Xers had a median of $64,000, and boomers $144,000.

The study found that survey respondents also had some money saved to use toward emergencies. Millennials had a median of $3,000 set aside, while Gen Xers had $5,000 and boomers had $15,000 in emergency funds.

Despite having some emergency money, around 22% of survey respondents said they have taken or plan to take a loan or withdrawal from a 401(k) or other workplace retirement savings account to pay for living expenses like their mortgage, rent or food during the pandemic. Millennials were most likely to take such withdrawals, at 33%, compared to 15% of Gen Xers and 10% of baby boomers.

In part, this may be because recently-enacted legislation, the CARES Act, allows those impacted by the coronavirus to withdraw funds from 401(k)s up to $100,000 without the 10% IRS penalty for withdrawals for people under the age of 59-1/2.

Keep in mind that even though there is no 10% IRS penalty for withdrawals from workplace retirement plans, income taxes will still be due on the money withdrawn, which can be paid to the IRS over a period of three years if needed. Or the withdrawn money can be returned to the plan over three years with no taxes due per the CARES Act.

It’s important for people considering withdrawing money from their retirement accounts to remember a couple of things. One, the CARES Act doesn’t actually mandate that a workplace retirement plan has to allow hardship withdrawals for those impacted by coronavirus—it is up to each individual plan administrator whether or not they will allow withdrawals.

Two, the rules about who will qualify for these withdrawals if allowed by the plan are: being diagnosed with COVID-19, having a spouse or dependent diagnosed with COVID-19, or experiencing a layoff, furlough, reduction in hours, or inability to work due to COVID-19 or lack of childcare because of COVID-19.

Experts remind people that those taking withdrawals need to follow all rules, or they will have to pay income taxes on the money withdrawn and owe the 10% penalty.

 

If you have any questions about the current retirement situation in America and what you can do now to protect yourself and your retirement savings, please contact us for a complimentary consultation.

Retirement planning is one of our focus areas, and we are here to help you as well as your family members and friends.

 

Contact Bulwark Capital Management in the Seattle area at 253.509.0395.

 

Source:

https://www.cnbc.com/2020/06/01/how-the-coronavirus-pandemic-is-hurting-retirement-confidence.html

Feb 24
0

Clearing Up Confusion About RMDs

By | Retirement, Tax Planning

Last month, we posted information about how the SECURE Act has increased the age for required minimum distributions (RMDs) from 70-1/2 to 72 starting this year, 2020.

If you turned age 70-1/2 in 2019, your RMDs were required for the 2019 tax year, and WILL BE required for 2020, 2021 and every year from now on.

For everyone turning 70-1/2 in 2020, your RMDs will not be required until the year you turn 72, even if you have received notification from your custodian to the contrary.

Because the law was passed and became effective within two weeks of passage, automated computer notifications and settings have not been changed yet. Call us if you have any questions!

 

LET’S MEET ABOUT YOUR ESTATE PLAN

Remember that inherited “stretch IRAs” have been shortened to 10 years in many circumstances due to the passage of the SECURE Act.

Let’s get together and discuss how this may affect your current estate plan, what burdens your heirs may face, and what we need to do now in conjunction with your estate attorney.

 

SECURE ACT CHANGES FOR EMPLOYEES AND EMPLOYERS

  1. PART-TIME EMPLOYMENT ELIGIBILITY

Unless there is a collectively-bargained plan in place (such as a union agreement), you may be eligible for your employer’s 401(k) or similar retirement benefit plan even if you work part time. If you have worked for your employer for one year consecutively for at least 1,000 hours, or for three consecutive years for at least 500 hours (roughly 25 work-weeks of 20 hours per week), you will be eligible.

  1. ANNUITY OPTIONS IN 401(k) PLANS

Even though employers were already allowed to offer annuities in their 401(k) plans, only about 9% of them did. The SECURE Act shifts the burden of legal liability away from employers who offer annuities in their plans; you will need to be diligent about examining them before choosing. (We can help you with this.) The DOL will require standardized monthly retirement income projections to help you compare; they are expected to issue guideline regulations about this in the coming months.

  1. ANNUITY PORTABILITY

Within a retirement plan, an annuity portability requirement has been added by the SECURE Act. If an annuity offering is removed from a 401(k) plan menu, you will be able to roll that annuity investment over into your own IRA with no penalty.

  1. FOR EMPLOYERS

The SECURE Act raised the tax credit for employers to $15,000 to set up, administer and educate employees about retirement plan changes over a three-year period. (NOTE: Employer contributions to 401(k) plans have been and still are tax deductible.) There is a new tax credit of $500 per year for automatic enrollment of employees into a company’s 401(k) plan—and the cap for auto enrollment has been raised from 10% to 15% of wages.

 

If you have any questions about this information, please don’t hesitate to call our office! You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

Sources:
https://www.plansponsor.com/in-depth/getting-secure-acts-lifetime-income-provisions-right/
https://humaninterest.com/blog/part-time-employees-secure-act/
https://www.investopedia.com/what-is-secure-act-how-affect-retirement-4692743
https://www.cnbc.com/2019/07/03/if-annuities-come-to-your-401k-savings-plan-heres-what-to-know.html
The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.
Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.
Jan 22
0

5 Things You Need to Know About the SECURE Act

By | News, Retirement, Tax Planning

The Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE) became effective Jan. 1, 2020, and many people have questions about it. Here are the top five things consumers should know.

 

  1. 72 is the new 70½

The SECURE Act raises the age at which retirees must begin taking Required Minimum Distributions from the awkward age of 70-1/2 to an even age 72, allowing for a couple more years of growth before RMDs kick in. NOTE: Anyone who reached age 70-1/2 in 2019 or before is subject to the old rules.

 

  1. You can keep making contributions to traditional IRAs

The act repeals the age limitation for making contributions to traditional IRAs, as long as you have earned income. Previously, the maximum age for traditional IRA contributions was set at 70-1/2 (this was the only type of retirement account which had an age limitation). Now, those working into their 70s and beyond can continue contributing to their traditional IRAs, even if they’re simultaneously required to begin drawing them down.

 

  1. The stretch IRA is dead

While existing “stretch IRAs” are grandfathered in and still follow the old tax rules, stretch IRAs are unlikely to be used by financial and estate planners in the future because their tax advantages have been drastically reduced.

Prior to the new law, stretch IRAs were primarily used for estate planning because they allowed a family to extend distributions over future generations—while the IRA itself continued to grow tax free. The person inheriting an IRA was required to take RMDs based on their life expectancy, which meant that a very young beneficiary could stretch out their distributions potentially over their lifetime.

Now beneficiaries must draw down the entire account within 10 years of inheriting it, possibly throwing them into a higher tax bracket. (They can take the money out in any year or years they like, as long as the account is empty by 10 years of the date of death of the original account owner.)

The new 10-year rule also applies to inherited Roth IRAs.

You may want to review your plan if you have stretch IRAs set up for your family, because any IRA inherited as of January 1, 2020 is subject to the new rules. Trusts you may have put in place to take advantage of stretch IRA rules probably won’t ameliorate taxes anymore either.

Keep in mind that the act does provide for a whole class of exceptions who aren’t subject to this 10-year rule; for them, the old distribution rules still apply. These beneficiaries (referred to as “Eligible Designated Beneficiaries”) are:

  • Spouses
  • Disabled beneficiaries
  • Chronically ill beneficiaries
  • Individuals who are not more than 10 years younger than the decedent
  • Certain minor children (of the original retirement account owner), but only until they reach the age of majority. NOTE: At this time, minor children would appear to be ineligible for similar treatment if a retirement account is inherited from a non-parent, such as a grandparent.

 

This new law is clearly designed to raise taxes. According to the Congressional Research Service, the lid put on the Stretch IRA strategy by the new law has the potential to generate about $15.7 billion in tax revenue over the next 10 years!

 

  1. The Roth got more attractive

Because contributions to Roth IRAs are made on an after-tax basis, a Roth account owner is not subject to Required Minimum Distributions at any age. An owner can leave their Roth to grow until their death, leave it to their spouse, who can then allow it to grow until they die. The second spouse can leave it to their children, who can then allow it to continue to accumulate tax-free for another 10 years, although they will now have to empty the account by the 10-year mark.

In terms of estate planning, Roth IRAs typically do not cause a taxable event when distributions are taken by a beneficiary.

Low individual tax rates by historical standards and a pending reversion in 2026 to the higher income tax brackets/rates that preceded the Tax Cuts and Jobs Act (TCJA) of 2017 can make this an opportune time for Roth conversions for those over age 59-1/2. These can benefit you, your spouse and heirs by strategically moving taxable retirement funds into tax-free Roth retirement accounts. The most common strategy for Roth conversions is ‘bracket-topping,’ where you convert enough to go to the edge of your tax bracket.

Keep in mind that these conversions need to be planned and done carefully, as they can no longer be reversed.

Remember, any account can be set up as a Roth – including CDs, government bonds, mutual funds, ETFs, stocks, annuities—almost any type of investment available.

 

  1. Other non-retirement related provision highlights:
  • You can use $5,000 of qualified money for childbirth or adoptions
  • 529 plan-approved “Qualified Higher Education Expenses” now include expenses for Apprenticeship Programs—including fees, books, supplies and required equipment—provided the program is registered with the Department of Labor
  • 529 plans can also be used for “Qualified Education Loan Repayments” to pay the principal and/or interest of qualified education loans limited to a lifetime amount of $10,000, retroactive to the beginning of 2019
  • The Kiddie Tax rules changed by the Tax Cuts and Jobs Act (TCJA) of 2017 have been reversed, (and can be reversed for the 2018 tax year as well)
  • The AGI (Adjusted Gross Income) “hurdle rate” to deduct qualified medical expenses remains lower at 7.5% of AGI for 2019 and 2020.
  • The following tax benefits for individuals are reinstated retroactively to 2018, and made effective onlythrough 2020 at this time:
    • The exclusion from gross income for the discharge of certain qualified principal residence indebtedness
    • Mortgage insurance premium deduction
    • Deduction for qualified tuition and related expenses

 

There are even more provisions of the SECURE Act designed to make it easier for small business owners to offer retirement plans to employees, as well as add annuities to their plans.

 

Call us if you would like to discuss how the new changes will affect your financial plan. You can reach Bulwark Capital Management in Tacoma, Washington at 253.509.0395.

 

The SECURE Act is a complex new law still being analyzed and assessed by industry experts. IRS clarifications may follow. The information in this article is provided for general information and educational purposes only. It is not designed nor intended to be applicable to any person’s individual circumstances. It should not be considered investment advice, nor does it constitute a recommendation that anyone engage in or refrain from a particular course of action.
Do not rely on this information for tax advice. Check with your CPA, attorney or qualified tax advisor for precise information about your specific situation.
Sources:
https://www.wealthmanagement.com/retirement-planning/what-advisors-need-know-about-secure-act
https://www.marketwatch.com/story/economists-like-annuities-consumers-dont-heres-the-disconnect-2019-12-23
https://www.investopedia.com/articles/retirement/04/031704.asp
https://www.kiplinger.com/article/retirement/T064-C032-S014-pros-cons-and-possible-disasters-after-secure-act.html
https://www.forbes.com/sites/leonlabrecque/2019/12/23/the-new-secure-act-will-make-roth-strategies-much-more-appealing-here-are-five-ways-to-use-a-roth/#3c239df6381d
https://www.marketwatch.com/story/secure-act-includes-one-critical-tax-change-that-will-send-estate-planners-reeling-2019-12-30
https://www.kitces.com/blog/secure-act-2019-stretch-ira-rmd-effective-date-mep-auto-enrollment/
Dec 20
0

The Rules Are Changing For 401(k)s In 2020

By | Financial Literacy, Retirement

The Rules Are Changing For Your 401(k) In 2020

If you’re still working and contributing to a 401(k) or similar workplace retirement plan, there is some good news for the upcoming year.

If you’re under age 50, the amount you can contribute to your 401(k), 403(b), most 457 plans and the federal government’s Thrift Savings Plan is now $19,500 for 2020—a $500 increase over 2019. Additionally, for those who are age 50 or over by December 31, 2020, the catch-up amount is now $6,500, up by $500 (and the first increase since 2015).

Keep in mind that you can still put away an additional $6,000 in an IRA—$7,000 for those age 50 or older. As always, these contributions can be made up until tax day, April 15, for the previous year’s taxes. That plus the new limits mean that an employee who is 50+ can sock away a total of $33,000 in tax-advantaged retirement accounts for 2020.

For Business Owners

For self-employed small business owners, the amount that can be saved in a SEP IRA or a solo 401(k) goes up from $56,000 to $57,000 in 2020, if all requirements are met. The limit on SIMPLE retirement accounts goes up from $13,000 to $13,500 in 2020 (plus $3,000 if you’re 50+). For defined benefit plans—similar to pensions of the past, but now used by high-earning self-employed individuals—the limit on the annual benefit goes up from $225,000 in 2019 to $230,000 in 2020.

Hardship Withdrawal Rule Changes

Even though making hardship withdrawals from 401(k) and 403(b) retirement plans will be easier for plan participants in 2020, for most employees, withdrawals should be a last-ditch option if you’re facing financial hardship. This is true especially if you’re under age 59-1/2, when you have to pay taxes plus a 10% tax penalty on the amount withdrawn.

However, it will be easier to start to saving again following a hardship withdrawal. Prior to 2020, employees who took a hardship withdrawal were barred from making new contributions to their plans for six months. Starting January 1st, this is no longer the case.

Also in 2020, employees can withdraw earnings, profit-sharing and stock bonuses rather than just their contribution amounts for 401(k) hardship withdrawals. (NOTE: 403(b) plan participants are still limited to just their contributions.)

Starting in 2020, your employer gets to decide whether you have to take a plan loan first—requiring payback with interest—before taking a hardship withdrawal; it’s no longer mandated by the government, it’s optional. Remember, taking a loan rather than a hardship withdrawal is almost always your best choice to keep your retirement on track.

Hardship Verification and Disaster Relief Rules

Hardship verification standards have been eased; an employer or retirement plan administrator is not required to determine if a hardship withdrawal is necessary by checking cash or assets available—the burden is on the employee to certify that it is.

To take a hardship withdrawal, employees must have an immediate and heavy financial burden or need that includes one or more of the following:

  1. Purchase of a primary residence.
  2. Expenses to repair damage or to make improvements to a primary residence.
  3. Preventing eviction or foreclosure from a primary residence.
  4. Post-secondary education expenses for the upcoming 12 months for participants, spouses and children.
  5. Funeral expenses.
  6. Medical expenses not covered by insurance.

In 2020, a seventh category has been added for expenses resulting from a federally declared disaster in an area designated by FEMA; the agency will no longer need to issue special disaster-relief announcements to permit hardship withdrawals to those affected.

 

If you have any questions about the new rules for 401(k)s and similar retirement savings plans, please call us! Our mission is to help you achieve your personal financial and retirement goals.

Call Bulwark Capital Management at 253.509.0395.

 

 

Sources:
https://www.forbes.com/sites/ashleaebeling/2019/11/06/irs-announces-higher-2020-retirement-plan-contribution-limits-for-401ks-and-more/#662aa23733bb
https://www.shrm.org/resourcesandtools/tools-and-samples/exreq/pages/details.aspx?erid=1312
https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-final-rule-eases-401k-hardship-withdrawals.aspx
Nov 20
0

Does Your Retirement Plan Include Inflation Risk?

By | Inflation Risk, Retirement

Inflation may not always be top of mind when you think about planning for retirement. Of course, you will likely consider your current expenses, but you need to account for what the costs of those expenses could be over time.

None of us can predict the future, but we can plan. Inflation diminishes purchasing power over the years and increases the costs of services that retirees and pre-retirees need. Given that more Americans are living longer, it can pay dividends to include inflation risk in your overall planning.

The other issue we have to contend with when it comes to inflation is that we may be lulled into a false sense of security since government measures of inflation have been very low in recent years. In addition, safer investments like money market funds, CDs and government bonds generally yield less than the cost of goods and services that many of us need. This makes it difficult for our safe money investments to keep pace with our expenses.

Lower government inflation measures also have an impact on Social Security benefits. Among the features of Social Security is that benefits are generally adjusted each year for inflation in what is known as a cost-of-living adjustment, or COLA. In October, the Social Security Administration announced a 1.6% COLA that takes effect in December for some beneficiaries and by January for most.

The average benefit increase for retired workers with the recently announced COLA is estimated to be $24 to $1,503 per month. Married couples both receiving benefits will see a $40 increase, on average, to a monthly payment of $2,531. The cost-of-living adjustment for 2020 is lower than that of 2019, which was 2.8%, and 2018, which was 2.0%.

Getting the most out of your Social Security benefit is extremely important for your retirement and it’s nice to have a feature that steps up with inflation. However, adjustments tracking official government statistics likely won’t cover the higher expenses you will face throughout retirement, so planning is important.

Health Care and Medical Cost Inflation

Then there is health care, among the biggest costs you may encounter in retirement and even now if you are still working and saving for retirement. Medical cost inflation is real and it can negatively impact your savings if you don’t have a way to offset it.

The Centers for Medicare & Medicaid Services (CMS) estimated earlier this year that health expenditures are projected to increase 4.8% overall in 2019, up from 4.4% growth in 2018.

For those still working and covered by an employer’s plan, costs are outpacing wages and inflation. Since 2009, the Kaiser Family Foundation says average family premiums have increased 54% and workers’ contributions have increased 71%, several times more quickly than wages (26%) and inflation (20%).

If you are already enrolled in Medicare and have been incurring out-of-pocket expenses then you know the impact of what higher drug costs or services that Medicare doesn’t cover can do to your monthly budget. We often cite figures from Fidelity Investments, estimating that a 65-year old couple retiring in 2019 can expect to spend $285,000 in today’s dollars for health care and medical expenses throughout retirement. The figure doesn’t include long-term care.

Once you have an idea of what your expenses are, we can get started now on developing or updating your plan to account for inflation. The other thing to keep in mind is that while inflation has been low in the past decade, it is best to plan using higher long-term averages.

There are several ways we can address inflation risk, depending on your situation. Strategies and options could include how your investments are positioned over time and guaranteed income solutions that adjust periodically to keep pace with inflation. You will want to meet with us, too, for a plan to cover long-term care as these costs can be a significant financial risk. Now is also a good time to contact us to discuss Medicare because the current open enrollment period runs through December 7 if you want to make changes or switch plans.

Let us know how we can help!

Contact Bulwark Capital Management at 253.509.0395.

 

Sources:
“Social Security Announces 1.6 Percent Benefit Increase for 2020,” October 10, 2019. Social Security Administration. Retrieved from: https://www.ssa.gov/news/press/releases/2019/#10-2019-1
“National Health Expenditure Projections 2018-2027,” February 2019. Centers for Medicare & Medicaid Services. Retrieved from: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ForecastSummary.pdf
“Benchmark Employer Survey Finds Average Family Premiums Now Top $20,000,” September 25, 2019. Kaiser Family Foundation. Retrieved from: https://www.kff.org/health-costs/press-release/benchmark-employer-survey-finds-average-family-premiums-now-top-20000/
“How to plan for rising health care costs,” April 1, 2019. Fidelity Investments. Retrieved from: https://www.fidelity.com/viewpoints/personal-finance/plan-for-rising-health-care-costs
Oct 24
0

The IRA Had a Birthday Last Month

By | Retirement

The IRA can provide many gifts as part of a comprehensive retirement plan.

The Individual Retirement Account (IRA) turned 45 on Labor Day. On September 2, 1974, the Employee Retirement Income Security Act, or ERISA, was enacted into law, introducing broad safeguards to protect employee savings in both defined benefit plans like pensions, and defined contribution plans.

The intent of Congress in initially establishing IRAs was to provide a tax-advantaged retirement savings plan for those workers at businesses that weren’t able to offer pensions. The IRA also made it possible to preserve the tax-deferred status of qualified plan assets when an employee changed jobs or retired, paving the way for rollovers.

It was still several years before the 401(k) plan would arrive, not through legislation, but rather a private letter ruling from the Internal Revenue Service (IRS). However, the 1974 act would benefit 401(k)s through the flexibility of rollovers.

Today, the IRA plays a vital role for Americans saving for retirement. IRA assets totaled $9.4 trillion at the end of March 2019, representing nearly one-third of the $29.1 trillion U.S. retirement market. Assets held in IRAs have been growing at an annual average pace of 10% over the past 25 years, from $993 billion in 1993, according to the Investment Company Institute (ICI).

Millions of Americans use IRAs to save for retirement. An estimated 42.6 million U.S. households, or 33.4%, owned IRAs as of mid-2018. An estimated 33.2 million households owned traditional IRAs, making it the most common type of IRA. A total of 22.5 million households owned Roth IRAs, and 7.5 million U.S. households owned employer-sponsored IRAs such as Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employees (SIMPLE) IRAs, according to the ICI.

The types of IRAs have expanded since 1974. SEP IRAs were created in 1978 to offset concerns that complex regulations were preventing smaller businesses from offering retirement plans. SIMPLE IRAs were created in 1996 specifically for employers with 100 or fewer employees.

The popular Roth IRA came into being as part of the Taxpayer Relief Act of 1997, enabling retirement savers with the option of contributing on an after-tax basis, and the ability to take tax-free withdrawals, so long as they qualify with IRS rules. However, Roth IRA contribution limits and eligibility are based on your modified adjusted gross income, or MAGI. For 2019, that means only single Americans with a MAGI of $135,000 or less may invest in a Roth IRA; while the MAGI limit for married Americans is $199,000.

The Roth IRA can be a beneficial tax-planning tool. While the traditional IRA offers tax-deferred savings benefits, it can have a downside. Once you reach age 70½, IRS rules require you to begin withdrawing from these accounts through Required Minimum Distributions (RMDs). But Roth IRAs – which have accumulated more than $800 billion in assets since first becoming available in 1998 – allow you to potentially garner their tax advantages through conversions.

In a conversion, taxes are paid on any pre-tax assets in a traditional IRA or 401(k)-like plan (if you qualify) that are moved into a Roth. In 2010, income limits were lifted on conversions so, these days, you can convert your IRA assets to a Roth regardless of your income or marital status. However, it’s important to do these conversions carefully, because as of 2018, they are no longer reversible (called a recharacterization.)

Now is the time to give us a call, if you have tax-deferred retirement accounts and are concerned that RMDs could bump you into a higher tax bracket in the future. It’s a good idea to begin tax planning several years before retirement and keep your tax bill low with periodic checkups on your interest income, potential capital gains and losses, and other tax planning needs. This way, we can help you minimize a portion of the taxes you may have to pay.

Lack of knowledge is the biggest obstacle preventing Americans from investing in an IRA. According to a LIMRA Secure Retirement Institute (LIMRA SRI) study published in early 2019, only 34% of Americans believe they are knowledgeable about IRAs. Men are far more likely to say they are knowledgeable about IRAs than women. Forty-two percent of men consider themselves knowledgeable about IRAs, compared with just 27% of women. Of those who don’t own an IRA, nearly half (46%) felt they did not understand enough about IRAs to contribute to them.

When it comes to retirement planning, everyone can use a helping hand. It doesn’t hurt from time to time to get an external check on how you’re progressing toward your financial goals. Whether it’s what investment options might make sense for your traditional IRA, tax planning, Roth IRA conversions, guidance on saving for retirement or an income plan you can’t outlive, we’re here whenever you need us!

Call Bulwark Capital Management headquartered in Tacoma, Washington at 253.509.0395

 

 

Sources:
“Happy Birthday, IRA! Congratulations on 45 Years,” September 12, 2019. Sarah Holden and Elena Barone Chism. Investment Company Institute. Retrieved from: https://www.ici.org/viewpoints/19_view_irabirthday
“Frequently Asked Questions About Individual Retirement Accounts (IRAs),” June 2019. Investment Company Institute. Retrieved from: https://www.ici.org/pubs/faqs/faqs_iras
“This is your last chance ever to reverse a Roth IRA conversion,” March 2018. MarketWatch. Retrieved from: https://www.marketwatch.com/story/this-is-your-last-chance-ever-to-reverse-a-roth-ira-conversion-2018-02-10
“LIMRA Secure Retirement Institute: Only 34 Percent of Americans Are Confident in their IRA Knowledge,” February 27, 2019. LIMRA Secure Retirement Institute. Retrieved from: https://www.limra.com/en/newsroom/industry-trends/2019/limra-secure-retirement-institute-only-34-percent-of-americans-are-confident-in-their-ira-knowledge/