Category

Tax Planning

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.

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/

Congress Looks to Provide More Options for Retirement Savers

By | Retirement, Tax Planning

While changes to traditional IRAs, RMDs offer some benefits, there are tradeoffs.

 

Broad proposals are in the works in the retirement savings arena to ease rules on tax-deferred savings vehicles, make it easier for employers to offer 401(k)-type savings plans and also convert balances into annuities for lifetime income.

In late May, the House of Representatives overwhelmingly passed the Setting Every Community Up for Retirement Enhancement Act of 2019 (SECURE). Key provisions within the SECURE Act offer more flexibility for when distributions would have to be taken out of tax-deferred accounts. On the flip side, the Act takes direct aim at estate planning strategies that enable heirs of traditional IRAs to stretch out those payments throughout their lifetimes.

In addition to the SECURE Act, there are other legislative proposals winding their way in the Senate, known as the Retirement Enhancement and Savings Act of 2019 (RESA), and the Retirement Security and Savings Act of 2019 (RSSA).

The SECURE Act would repeal the age cap for contributing to a traditional individual retirement account (IRA). Currently, if you have a traditional IRA you aren’t able to contribute to it after age 70½. That is different from Roth IRAs, which don’t have age caps, though the amount you can contribute begins to be phased out above $122,000 for single filers and $193,000 for married, joint filers.

The act would increase the starting age for required minimum distributions (RMDs) to 72, up from 70½. This provides an additional 18 months of tax-deferred growth for tax-qualified plans. It also could mean a higher RMD if you were to leave that money in the account until age 72 – because of the potential for the account’s growth and shorter life expectancy (that is, if the life expectancy tables used to calculate RMDs aren’t updated).

The “Stretch” IRA would be eliminated for non-spouse heirs. This essentially means that heirs who aren’t spouses would no longer be able to stretch out required minimum distributions from inherited tax-qualified accounts like IRAs and defined contribution plans over their lifetimes. Some beneficiaries would be exempt, including the disabled or chronically ill, minors, and individuals less than 10 years younger than the account owner. Those not meeting that criteria would have to withdraw the money over a 10-year timeframe under the SECURE Act. That time frame compresses to within five years under the RESA bill in the Senate if the account value exceeds $400,000.

For the various changes to take effect in the various bills, lawmakers from the House and Senate would have to reconcile any differences before a full House and Senate vote. That means it is still early days, as they say, with regards to the changes. However, we think it is important for you to consider looking into other strategies and options if what is, in essence, the “death” of the Stretch IRA is incorporated into law and the tax code.

Let’s talk about your retirement plan, your tax-deferred qualified accounts, ways to minimize taxation during retirement, and ways you can transfer wealth to your heirs in a tax-advantaged manner. Call Bulwark Capital Management at 253.509.0395

 

Sources:
 “Secure Act Calls for Changes to IRAs, RMDs,” June 14, 2019. Rachel L. Sheedy. Kiplinger’s Retirement Report. Retrieved from: https://www.kiplinger.com/article/retirement/T032-C000-S004-secure-act-calls-for-changes-to-iras-rmds.html
“Washington Threatens to Change Retirement Planning Forever,” June 9, 2019. Dan Caplinger. Motley Fool. Retrieved from: https://www.fool.com/retirement/2019/06/09/washington-threatens-to-change-retirement-planning.aspx
Social Security Taxation

Are your Social Security benefits taxable?

By | Retirement, Social Security, Tax Planning

The answer is: Yes, sometimes.

If you don’t have significant income in retirement besides Social Security benefits, then you probably won’t owe taxes on your benefits. But if you have large amounts saved up in tax-deferred vehicles like 401(k)s, you could be in for a surprise later.

AGI (Adjusted Gross Income) versus Combined Income.

You are probably familiar with what AGI, or adjusted gross income, means. To find it, you take your gross income from wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts and other taxable income, like unearned income, that must be reported on tax returns.

(Unearned, taxable income can include canceled debts, alimony payments, child support, government benefits such as unemployment benefits and disability payments, strike benefits, lottery payments, and earnings generated from appreciated assets that have been sold or capitalized during the year.)

From your gross income amount, you make adjustments, subtracting amounts such as qualified student loan interest paid, charitable contributions, or any other allowable deduction. That leaves you with your adjusted gross income, which is used to determine limitations on a number of tax issues, including Social Security.

Combined Income is a formula used after you file for your Social Security benefits.

Whether or not your Social Security benefits are taxable depends on your combined income each year, which is defined as your adjusted gross income (AGI) plus your tax-exempt interest income (like municipal bonds) plus one-half of your Social Security benefits.

The IRS provides a worksheet for this. (See the worksheet here: https://www.irs.gov/pub/irs-pdf/p915.pdf#page=16)

If your combined income exceeds the limit, then up to 85% of your benefit may be taxable. But in accordance with Internal Revenue Service (IRS) rules, you won’t pay federal income tax on any more than 85% of your Social Security benefits.

What are the combined income limits?

Social Security benefits are only taxable when your overall combined income exceeds $25,000 for single filers or $32,000 for couples filing joint tax returns.

If you file a federal tax return as an “individual” and your combined income is:

  • Between $25,000 and $34,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $34,000 – up to 85% of your benefits may be taxable.

If you file a “joint” return, and you and your spouse have a combined income that is:

  • Between $32,000 and $44,000 – you may have to pay income tax on up to 50% of your benefits.
  • More than $44,000 – up to 85% of your benefits may be taxable.

RMDs (Required Minimum Distributions) can be an unwelcome surprise.

Starting at age 70-1/2, you are required to start taking money out of your tax-deferred accounts, whether you need the income or not. These accounts include:

  • Traditional IRAs
  • SEP IRAs
  • SIMPLE IRAs
  • Rollover IRAs
  • Most 401(k) and 403(b) plans
  • Most small business retirement accounts

There are precise formulas for calculating how much you have to withdraw each year based on the IRS Uniform Lifetime Table. If you miscalculate, or if you or your plan administrator fail to move the money by December 31, you could face a 50% tax penalty; there is no grace period to April 15.

NOTE: The table goes up to age 115 and beyond. You can find the IRS life expectancy table as well as an IRS worksheet for calculating RMDs here: https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

Simplified RMD example for illustrative purposes only:*

Let’s say you are single, age 72, and you have one qualified account—$400,000 was the value of your 401(k) plan as of December 31 last year. You divide $400,000 by your life expectancy factor of 25.6 which give you $15,625.

This is the amount that you have to take out of your 401(k), which will count as part of your AGI.

Simplified Combined Income example for illustrative purposes only:*

To continue with our simplified example, let’s say you, our 72-year-old single person above, receives $2,800 per month in Social Security ($33,600 per year) and you don’t have any other source of income besides the RMD taken from your 401(k) account as illustrated above.

Based on the combined income formula:

AGI = $15,625

+ Non-taxable interest = $0

+ Half of Social Security = $16,800

__________________________________________

Your total combined income is = $32,425   

Because you are over the combined income limit of $25,000 for an individual, but less than the $34,000 which would require 85%, you would pay taxes on 50% of your Social Security benefit.

###

At Bulwark Capital Management, we provide retirement planning and Social Security benefit optimization, and we work in conjunction with your CPA or tax professional to help you consider taxes and how to minimize them as part of your overall retirement plan. Call us at
253.509.0395.

* This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or penalties. The information in this article is provided for general education purposes only. 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.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp

https://www.investopedia.com/terms/t/taxableincome.asp

https://smartasset.com/retirement/how-to-calculate-rmd

https://www.irs.gov/pub/irs-tege/uniform_rmd_wksht.pdf

It’s Tax Season for Your 2018 Returns – Will You Owe More?

By | Tax Planning | No Comments

This year, the deadline to file your income tax returns is April 15, 2019.

As of early February of 2019, Time Magazine1 reported that many Americans who had already filed their 2018 taxes were shocked by their lower refunds this year likely stemming from the “Tax Cuts and Jobs Act” law that passed in December 2017, which significantly overhauled the tax code in the U.S.

“The initial batch of tax refunds in the first two weeks of the season declined an average of 8.7% from last year as of Feb. 8, according to a report from the Internal Revenue Service. 1

“Because so many pieces of the tax code shifted, it’s difficult to tell why certain people are affected differently than others, according to tax specialists and financial experts. 1

“Those most at risk for receiving less money in their tax refunds are taxpayers who itemize their deductions and have no dependents, homeowners in high tax states and employees who have unreimbursed business expenses.” 1

Retirees in lower tax brackets who don’t itemize and who live in states with low taxes will probably not be affected, or may even pay less because of the higher standard deduction, which nearly doubled.

“The rise in the standard deduction might mean that retirees can achieve roughly the same overall deductible by taking the standard amount as they could by itemizing.”2

But there is much uncertainty as people approach this tax season with trepidation about their own situation.

Healthcare rule changes when it comes to taxes.

There are a couple things you should know about healthcare expenses this tax season.

  1. You may be able to deduct more for unreimbursed allowable medical care expenses2.

For the 2018 tax year, the IRS allows you to itemize and deduct healthcare expenses if they totaled more than 7.5% of your AGI (adjusted gross income).

As an example, if your AGI is $45,000, you can itemize and deduct healthcare expenses from the 7.5% mark, or $3,375, up to your amount spent. In this scenario, if you spent $5,375 on allowable unreimbursed healthcare expenses, you will be able to deduct $2,000 of them.

For the 2019 tax year, this percentage will revert back to 10%, so the allowable deduction will be lower going forward.

  1. The ACA is still in effect.

For retirees who don’t have health insurance or Medicare yet, know that the ACA mandate and penalty for not having health insurance is still in effect for the 2018 tax year.

The federal penalty will disappear in 2019 per the new tax code. However, some states—like New Jersey, Massachusetts and the District of Columbia—will still charge penalties. And lawmakers in Vermont and Rhode Island and other states intend to impose new state penalties in the future.3

Regardless of the law changes, many retirees are shocked to find that they owe income taxes in retirement.

For retirees who have saved up a lot of money in tax-deferred accounts like traditional IRAs or 401(k) plans, when RMDs (required minimum distributions) begin at age 70-1/2, the tax ramifications can hit hard.

  1. Many people even have to pay taxes on their Social Security income.5

RMDs are taxable as income. For individuals, if your combined income* is between $25-$34,000 (or between $32-44,000 per year for couples), you may have to pay income tax on up to 50% of your Social Security benefits. More than that, and up to 85% of your benefits may be taxable.

*The IRS defines combined income as your adjusted gross income, plus tax-exempt interest, plus half of your Social Security benefits.6

  1. When you start RMDs makes a difference.4

As you approach 70 1/2, you can choose to take your first minimum withdrawal during the year you turn 70 1/2, or you can take it by April 1 of the year after you turn 70 1/2. Your choice can have significant tax implications, because if you don’t take your initial minimum withdrawal during the year you turn 70 1/2, you must take two—and pay the resulting double dip of taxes—in the following year.

  1. Calculations for withdrawals are tricky—and doing it wrong can be costly.4

For each year, you must take at least the required minimum withdrawal by Dec. 31 of that year or owe the tax plus a 50% penalty. There is no grace period to April 15.

The calculations for withdrawals require you to take your Dec. 31 prior year tax-deferred account balances and divide by your life-expectancy figure (from Table III in Appendix B of IRS Publication 590-B) based on your age as of the end of the tax year. You may be able to aggregate balances if you have multiple accounts and take the RMD from only one account, or you may not be able to, depending on IRS rules.

  1. You may be able to delay 401(k) distributions if you are still working after age 70 1/2.4
  2. You may be able to donate an IRA required distribution directly to a qualifying charity and satisfy the taxes which would have been due.4
  3. Roth IRA accounts don’t have distribution requirements in retirement.5

However, Roth 401(k) accounts do require withdrawals starting at age 70 ½. Income tax is generally not due on a Roth 401(k) distribution, except for any untaxed portion matched by an employer.

 

Don’t try to do this alone, we’re here to help.

As a service to our clients, we provide retirement tax planning in conjunction with your tax professional or CPA. Let’s talk about how we can create a plan now to pay the proper amount of tax later in retirement. You can reach Bulwark Capital Management in Silverdale, Washington at 253.509.0395

 

This material is not intended to be used, nor can it be used by any taxpayer, for the purpose of avoiding U.S. federal, state or local taxes or tax penalties. Please consult your tax professional, CPA, personal attorney and/or advisor regarding any legal or tax matters.

Sources:
1 “Many Americans Are Shocked by Their Tax Returns in 2019. Here’s What You Should Know.” Time.com. http://time.com/5530766/tax-season-2019-changes/ (accessed March 11, 2019).
2 “How Will the New Tax Law Affect Retirees?” Fool.com. https://www.fool.com/retirement/2019/01/07/how-will-the-new-tax-law-affect-retirees.aspx (accessed March 11, 2019).
3 “Changes to Obamacare in 2019 and the Effect on the Premium Tax Credit.” TheBalance.com. https://www.thebalance.com/changes-to-obamacare-and-insurance-4582310 (accessed March 11, 2019).
4 “Understanding the IRA mandatory withdrawal rules.” MarketWatch.com. https://www.marketwatch.com/story/understanding-the-ira-mandatory-withdrawal-rules-2015-03-09 (accessed March 11, 2019).
5 “7 New Taxes Retirees Face.” Money.usnews.com. https://money.usnews.com/money/retirement/iras/slideshows/new-taxes-retirees-face (accessed March 11, 2019).
6 “Avoid Paying Taxes on Social Security Income.” Investopedia.com. https://www.investopedia.com/ask/answers/013015/how-can-i-avoid-paying-taxes-my-social-security-income.asp (accessed March 12, 2019).