Archive for the ‘Retirement Assets’ Category
New Retirement Account Option – myRA
Filed under: Retirement Assets | Tags: Employee Benefit Research Institute, G-Fund, Government Securities Investment Fund, income limit, My Retirement Account, myRA, Obama, retirement plan trinkets, Roth-IRA, Thrift Savings Plan, TSP
Comments (3) Originally published in the Cedar Street Times
March 21, 2014
President Barack Obama announced in his State of the Union Address at the end of January, the formation of a new retirement plan option which will likely get started towards the end of 2014. The account type, dubbed “myRA” (pronounced “My R.A.”) is short for “My Retirement Account.” Despite a plethora of retirement plan options already available, one might ask, do we need yet another option to complicate planning? Despite all of the options available, roughly one third of employees in the United States still do not contribute to any type of retirement plan. Another third participates in an employer sponsored plan, and roughly the other third has an employer sponsored plan and some type of IRA as well. In a survey conducted by the Employee Benefit Research Institute, 57 percent of Americans say they have less than $25,000 in total savings (excluding the value of their house or defined benefit plans).
The point of the myRA is to help make it more accessible for the bottom third of savers to work on saving for retirement. My analysis is that in its current form, it may mildly assist in this manner, but could be used by more savvy investors as a way to access, to a limited extent, the G-Fund, a solid short-term investment option only available to people with government sponsored TSP programs.
The problem with myRAs is that they do not automatically enroll employees upon initial employment. This has been a desire of the President, but would require Congressional action. The goal of automatic enrollment would be to make it the default option, unless the employee deliberately opts out of the program. Without automatic enrollment there is very little reason to believe employees would be more likely to join these plans than ones already offered by employers. That said, many small employers currently do not offer plans to employees due to the added expense of operating and/or contributing to the plan, and most of them exclude a lot of short-term or part-time employees.
The myRA would have a very low entry point – with only a $25 opening contribution by an employee, no fees or requirements for the employer to contribute, and a $5 per paycheck minimum contribution, it is theoretically much more accessible, especially for short-term and part-time employees. The plan would also be portable from one employer to the next, helping to reduce “retirement plan trinkets” – my term when people carry around a half dozen retirement plans from all their former employers. The program would be administered by the federal government, and since it would have only one investment option, there should be a lot less questions and hassles to set up. The employer would simply direct a portion of the employee’s direct deposit to the government, instead of the employee’s bank account.
The lone investment option is the Thrift Savings Plan offered G-Fund – Government Securities Investment Fund. This fund invests in United States government securities and its goal is to outstrip inflation but is also guaranteed by the full faith and credit of the United States government. Its guaranteed return is the weighted average of all outstanding Treasury notes and bonds with a four year or longer maturity. So effectively you get a long-term rate, even though your investment could be short-term. Since 1987 its average return has been 5.4 percent per year. In 2013 it returned 1.89 percent – not fantastic, but much better than most short-term investments available today, and with no risk.
One of the key characteristics of a myRA is that it is effectively a Roth IRA. This means you get no tax benefit for putting money into the account, but it grows tax-free forever, has no required minimum distribution when you turn 70 1/2, and there is no tax on the principal or earnings when you withdraw it in retirement. Like a Roth IRA, f you need to take money out sooner, you can take out your original contributions with no penalties (but not earnings). The same income phaseouts for Roths apply to myRAs as well – you must have adjusted gross income less than $129,000 filing Single, and $191,000 Married Filing Joint ton contribute. In addition, the same aggregate IRA contribution limits ($5,500 for people under 50 and $6,500 for people over 50) will apply for all IRAs, including your myRA.
A key provision with a myRA is that once the account balance hits $15,000 (or 30 years) it is automatically converted to a regular Roth IRA. However, people can rollover funds from a myRA to a regular Roth IRA at any time to keep their balance below $15,000. I could see this used by people who like access to the G-Fund as a safe, possibly, short-term investment that provides a decent rate of return.
Personally, I think we need to consolidate and simply our retirement plan options, and not create more animals to supervise. But for now, the tax code continues to grow more complex – benefitting some, and making things more confusing for most.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
SIMPLE IRA Salary Deferrals Due Jan. 30 for Self-Employed
Filed under: Retirement Assets | Tags: due date, employee deferral, Fidelity, January 30, matching contribution, Savings Incentive Match Plan for Employees, Schwab, SIMPLE IRA, sole proprietor, three percent, Vanguard
Leave a comment Originally published in the Cedar Street Times
January 24, 2014
One commonly used retirement plan by small business owners is a SIMPLE IRA plan. SIMPLE IRA is simply an acronym for “Savings Incentive Match Plan for Employees Individual Retirement Account.” The plan is, well, fairly simple to set up and operate as well. You simply fill out the simple SIMPLE form by October 1 and find a custodian such as Vanguard, Schwab, Fidelity, or others to handle the money and you are in business.
There are generally no costs or nominal costs to setup and operate the plan, depending on the custodian and amounts invested, and there are no required annual plan filings with the government. This has made them appealing for many small companies with employees compared to a 401(k). For 2013, participants can defer up to $12,000 of their earned wages plus another $2,500 catch-up contribution if over age 50.
The employer also agrees to make a three percent maximum matching contribution. For example, if the employee defers nothing into the plan from his or her salary, then the employer has no match requirement. If the employee defers two percent, the employer has to contribute two percent. If the employee defers three percent, then the employer has to match three percent. If the employee defers more than three percent, the employer still only has to contribute three percent. (The employer also has the option to select a two percent nonelective contribution in lieu of the three percent match. This means the employer contributes two percent whether or not the employees contribute anything.)
The employer match portion is in addition to the $12,000 salary deferral and possible $2,500 catch-up contribution. The three percent match also has a salary cap of $255,000. So the maximum employer match is $7,650. I know what most of you are thinking right now…”Gee, that means I will only get a match on the first third of my salary. What a rotten deal!” Ha! If you have one of those jobs paying over $750,000 a year, your company is in the wrong plan!
The employer has to remit the employee’s salary deferral portion to the SIMPLE custodian as soon as reasonably can be done, but in any case no later than thirty days after the end of the month in which the employee’s paycheck was dated. If the deferral is sent to the custodian within seven days of the paycheck date, it is a safe harbor and will always be considered timely deposited. The employer match portion, however, can be paid as late as the tax return due date for the employer, including extensions.
So how does it work with the business owner and his or her deferrals? What about the match? If the business is setup as an entity such as a corporation and the owner receives a paycheck like any other employee, then the same rules apply that apply to the other employees.
If the owner is self-employed however, such as a sole proprietorship, the net earning for the entire year are considered earned/paid on the last day of the year, and the owner must remit the salary deferral portion to the custodian by January 30th (30 days after month end) of the following year. So 2013 salary deferrals for a self-employed individual are due in six days. (This includes the $12,000 plus the $2,500 catch-up if applicable.)
The three percent match is not due until the tax return due date for the owner (generally April 15), including any extensions filed (generally October 15). The employer match of three percent for the owner is calculated based on the amount of Schedule SE, section A, line 4, or Section B, line 6, before subtracting any contributions to the plan for the owner.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Ask Your Husband if He is Still Married to Someone Else!
Filed under: Divorce, Retirement Assets, Trusts and Estates | Tags: beneficiary, designation, ERISA, IBEW Pacific Coast Pension Fund v. Lee, pension benefits, U.S. Court of Appeals, Wayne Lee
Leave a comment Originally published in the Cedar Street Times
December 14, 2012
As professionals dealing with trust and estate issues, CPAs and attorneys talk a lot about making sure your beneficiary designations are up-to-date on any kind of retirement assets you may own, as they generally trump your estate plan. There are many sad stories of widows or widowers losing assets to their deceased spouse’s ex-wife or ex-husband simply because they did not update the beneficiary designation forms. But sometimes, even that is not enough.
At a tax seminar I attended last week, we discussed an interesting court case which makes you think you can never be too careful. The case goes something like this: Wayne and Cleta Lee were married in the state of Washington in 1979. In the early 1990s, Wayne moved to Mississippi. They never got a divorce, but they went their separate ways. In 1995, Wayne decided to marry a woman in Mississippi named Lois, but he did not bother to divorce Cleta.
Wayne was an electrical worker and was entitled to a pension when he retired in 1997. On the pension application he listed himself as married and Lois as his wife. He designated her specifically as the beneficiary and even attached a copy of the marriage certificate. They both signed the application and he started receiving his pension. In January 2007 Wayne passed away and Lois started receiving pension benefits in February. Later that month, his first wife from Washington applied for pension benefits from the company as well!
The case eventually went to court and the district court ruled in favor of Lois since she was specifically identified in the pension application as the beneficiary for spousal benefits. Cleta appealed and the case went to the U.S. Court of Appeals. The U.S. Court of Appeals cited Employee Retirement Income Security Act (ERISA) rules and state laws and said the district court made its decision on the wrong basis. They overturned the ruling and have now sent it back to the district court to determine the legal spouse. They said the benefits go to the legal spouse at the time of his passing regardless of who was specifically named as the spouse. If the district court determines Cleta to be the legal spouse, which the U.S. Court of Appeals hinted at quite heavily, Lois will lose out on her pension benefits. (IBEW Pacific Coast Pension Fund v. Lee (2012) U.S. Court of Appeals for the Sixth Circuit, Case No. 10-6433)
So for all of you with spouses that have multiple wives or husbands, you may want to have a little chat! Obviously the scary situation would be if you never knew your spouse was not officially divorced from a prior marriage, or worse, never knew they were married before.
Does this mean we will be advising clients in the future to have background checks done before picking out a ring? I sure hope not.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
SIMPLE-IRA – 10 Days Left!
Filed under: Retirement Assets | Tags: 401(k), employer match, IRA, October 1, retirement, Savings Incentive Match Plan for Employees, self-employed, SEP-IRA, SIMPLE, SIMPLE IRA, small business
Leave a comment Originally published in the Cedar Street Times
September 21, 2012
If you started a business in 2012 or have an existing small business, you have ten days left (October 1) until the annual deadline to establish a SIMPLE-IRA if you want to make contributions this year for yourself or your employees. A SIMPLE-IRA is a solid retirement option for small businesses for a number of reasons. The first reason is that they are free and easy to set-up. By comparison, if you start a plan such as a 401(k), you can bank on approximately$1,000 a year in administrative fees. The SIMPLE-IRA (Savings Incentive Match Plan for Employees) is established by filling out an easy form (IRS Form 5304-SIMPLE) and signing and dating it. You also need to contact a custodian which will be responsible for initially handling the funds. If you have a financial advisor, this person will often be the point-person. Otherwise, you can contact Vanguard, Fidelity, Schwab, or a number of other financial companies and they will be happy to set you up at no charge in minutes. They may have account fees, but those should be minimal.
The SIMPLE-IRA allows the employees (and the owner) to contribute up to $11,500 of their wages through payroll deductions into a retirement account. This directly reduces their taxable wages. The other part is the employer match. Each year, before the year starts, the employer chooses a one, two, or three percent match, or a two percent guaranteed contribution. If the employer chooses one of the match options, they will match the employee’s (and their own) contributions dollar-for-dollar up to a cap of one, two, or three percent of the employee’s annual wages. The match is tax deductible by the business but is not taxable income to the employee. A business can choose to exclude employees that are not expected to make over $5,000 during the year or have not made over $5,000 in any two prior years (whether or not consecutive).
Self-employed individuals with or without employees can also take advantage of this plan. If you are a sole proprietor, your wages are determined by your net income at the end of the year. You must submit your contributions by January 30 of the following year. The match for your employees and yourself does not have to be submitted until the tax return due date.
Self-employed individuals with no employees that net over $70,000 may wish to consider a SEP-IRA since you can contribute more at that point. A SEP-IRA is also easy and inexpensive to maintain.
Of course, the best reason to set up a SIMPLE plan is to start contributing to your retirement and helping others see the value as well.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Don’t Want to Lock up Cash in a Retirement Account? Consider Roth by April 17.
Filed under: Retirement Assets | Tags: contributions, conversions, five year rule, IRA, penalty free, retirement, rollover, Roth-IRA, tax free, Traditional IRA, withdrawal
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
April 3, 2012
A lot of people like the idea of contributing to a retirement plan, but do not like the idea of locking up the money until retirement without being penalized. People are often concerned about supplementing income if they lose their job, or have an unexpected major expense, or even if they are saving for a big purchase such as a car or a home. If you find yourself keeping money in a taxable investment account, savings, or checking account for these purposes, I strongly encourage you to start contributing it to a Roth IRA if you are eligible.
The beauty of a Roth IRA is that you can take out your direct contributions tax-free and penalty-free at any point. For example, if you contribute $5,000 a year for three years, you can always take out up to that $15,000 at any point. What you cannot take out are the earnings. If it grows to $16,000 through interest, dividends, or appreciation, you cannot take out that last $1,000 without penalty and tax until you retire. The big benefit is that your Roth IRA is an umbrella that protects the assets under it from being taxed if they generate income. You will pay no tax on the $1,000 earnings in the Roth IRA – whereas, you would if it was held in a taxable account. You can hold almost any investment in a Roth-IRA including cash, stocks, bonds, mutual funds, or even alternative investments such as rental property. You can currently contribute up to $5,000 a year ($6,000 over age 50) and you have until April 17, 2012 to contribute for tax year 2011. Don’t miss out!
Some advisors incorrectly cite a five-year rule that says you have to have the account open for five years before taking penalty-free withdrawals. This applies in certain circumstances, but not to direct contributions. What they are failing to understand are the ordering rules for distributions. I will say again, you can always take out up to the sum-total of your direct contributions made to the account with no tax and no penalty. Be aware that rollover conversions from other retirement plans and traditional IRAs are not considered direct contributions. You should get competent tax advice if you are going to take out beyond your direct contribution total.
To be eligible to make a Roth IRA contribution, you must have at least as much earned compensation as you want to contribute. If you file jointly, you can contribute for your spouse even if he/she does not work enough (or at all) assuming you earn enough compensation between the two of you. Your ability to contribute starts phasing out as your income hits $107,000 if filing single, and $169,000 for married filing jointly. These amounts are based on special modifications to your adjusted gross income, so you would want to verify with your tax professional if you are close to these thresholds. You can also contribute to a Roth IRA even if you contribute to an employer-provided plan (some exceptions for married filing separate), however, your contributions to traditional IRAs and Roth IRAs are aggregated for contribution limit purposes.
One other advantage of the Roth is that you can continue to contribute during your entire life as long as you have earned compensation, and there are no required minimum distributions when you reach age 70 1/2 as there are for traditional IRAs.
What you might find by contributing, is that something else works out in your financial life whereby you do not end up needing that cash or part of it after all, and at that point, you will be very glad you contributed to the Roth during those years. To set up a Roth IRA, talk to your financial advisor. If you do not have an advisor, you can go online to a financial institution like Vanguard or Fidelity and set one up in 15 minutes.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Are Social Security Benefits Taxable? If So, Why?
Filed under: Retirement Assets | Tags: benefits, retirement, Social Security, taxable
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
October 5, 2011
If you answered both “No,” and “Partially,” you are correct. This seemingly simple question actually requires a full page of number crunching to determine the correct answer on your tax returns and will result in anywhere from zero to 85 percent being taxable. If you go to my website http://www.tlongcpa.com/Financial-Tools and look in the income section there is a calculator that will do it for you!
Otherwise, below is a quick rule of thumb to determine where you fall on the tax ladder. Stick this in your Social Security file.
First, take half the Social Security benefits you earned for the year and add to that all your other income including tax exempt interest (Add back certain income exclusions such as foreign income and adoption benefits). We will call this modified income.
“No”
If your modified income is less than $32K and you are married filing joint (MFJ) then none of your Social Security will be taxable. For everyone else, if your modified income is under $25K, then nothing will be taxable (exception – married filing separate and lived with spouse will always result in 85 percent of all Social Security benefits taxed regardless of other income).
“Partially”
If you do not want to do much head scratching and you want to estimate conservatively, here is my advice: If your modified income is between $32K and $44K as MFJ ($25K-$34K for everybody else), assume 50 percent of your total Social Security benefits are taxable. If over those ranges, assume 85 percent of your total benefits are taxable.
If you want to be a pencil pushing tax hero here is what you do: If your modified income is between $32K and $44K as married filing joint ($25K-$34K for everybody else), 50 percent of the amount above $32K MFJ ($25K others) is the taxable amount of your Social Security benefits, capped at 50 percent of your Social Security benefits. If your modified income is above those ranges, then your taxable Social Security benefits will be the lesser of A) 85 percent of your Social Security benefits OR B) 85 percent of your modified income above $44K MFJ, ($34K others) plus the lesser of 1) $6,000 MFJ ($4,500 others) or 2) 50 percent of your Social Security benefits.
Why is it taxed?
Most people want to know why the government taxes Social Security benefits, especially considering that you already paid income taxes on your Social Security contributions through the years. To an extent, Social Security benefits are double taxed as a result. We do need to remember, however, that Social Security is not just a retirement plan, but includes Medicare Parts B and D, disability, survivor’s benefits and many other social programs we may benefit from if needed. Prior to 1983, Social Security benefits were not taxed. In the late 1970s and early 1980s the government realized the system would soon be bankrupt because of added promises and demographics, so laws were passed to reform Social Security, including taxation of benefits. Hmmm. Kind of sounds like the same debate we are having again… However you slice it, the bottom line is that it is not sustainable in its current form and we will have to cut benefits, raise taxes, or go further in debt. I surmise it will be a combination of all three.
There may be a few other circumstances and specific rules that affect you, and you should consult with a qualified tax professional regarding your tax situation if you need an exact answer. Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950. He can be reached at 831-333-1041.
Losses on 401(k)s, IRAs, and 529 Plans
Filed under: Retirement Assets, Tax Strategy | Tags: 401(k), 529 plan, basis, Coverdell ESA, Form 8606, IRA, losses, miscellaneous itemized deductions, nondeductible IRA contributions, retirement, Roth-IRA, SEP-IRA, SIMPLE IRA
Leave a comment Originally published in the Pacific Grove Hometown Bulletin
September 21, 2011
The stock market seems like a pinball these days bumping off financial forecasts and being paddled by fiscal policy promises. Unable to stomach some of the lows over the past few years more than a few people gave up the game and pulled money out of investments seeking the “security” of cash. Others may have felt they had no choice, and cashed out their retirement savings to live on; some realizing they contributed more money to the plan than they got back! Perhaps this happened to your retirement or education savings accounts, or will happen at some point. But can you get a tax deduction for the loss in value you have incurred?
Well, it depends. The chief determining factor is whether or not you have basis in your account. Basis in a retirement or education account is created if you make contributions for which you receive no tax deduction when contributed. For example – Roth-IRA contributions are not deductible when they are made, so the original contribution amount each year adds to your basis. Education savings through section 529 plans and Coverdell Education Savings Accounts are the same way. Many employers now offer a Roth contribution option within a 401(k) plan. These contributions also create basis.
Traditional 401(k), SEP IRAs, SIMPLE IRAs, and traditional IRA contributions provide you with an immediate tax deduction, so they provide no basis. However, if you were over a certain income threshold and tried to make traditional IRA contributions, you may have been allowed to contribute to the account, but prohibited from taking the deduction. This is termed a “nondeductible IRA contribution;” it would have created basis; and it is tracked on Form 8606 in your tax returns.
If it is determined you do have basis, and for a strategic reason (or by necessity) you end up liquidating the IRA (all IRAs of the same type must be liquidated for this to work), and the value of the IRA is less than your basis in the account, then you are eligible to take the loss as a miscellaneous itemized deduction subject to the two percent threshold. If you have more than one section 529 plan, the calculation is a little different.
Liquidating your retirement accounts to get a possible tax deduction is not typically an advisable course of action for many reasons, and you would want to discuss this with your tax professional and investment advisor first. However, sometimes, this can be a strategic move. More often, it will have been done out of perceived necessity or by accident. If it happens, however, you certainly want to make your tax professional aware of your losses and take the deduction if you are eligible.
Two quick examples: 1) Melissa, a parent, starts a 529 account (only has one) and contributes $10,000 towards her child’s future education. A year later, the investments have fallen, and the account is only worth $6,000. Melissa could liquidate the account and take a $4,000 loss on Schedule A. Then she could start a new 529 plan putting the $6,000 back into the plan. Melissa has just harvested a $4,000 loss. 2) Joseph opened his first Roth-IRA three years ago and contributed $14,000 over the three years. He received some bum advice from a friend and invested most of it in a penny stock mail-order belly-dancer business that went belly-up. Joseph’s account is now only worth $1,000. He could liquidate his Roth-IRA and take a $13,000 loss on Schedule A.
There may be other circumstances and specific rules that affect you, and you should consult with a qualified tax professional regarding your tax situation. Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950. He can be reached at 831-333-1041.
