Kansas and Missouri Estate Planning

When Should I Roll My Employer's Retirement Plan to My Own IRA?

You should consider a number of factors before rolling over your 401(k).

You are planning to retire before you turn 59 ½.

This means you are planning to retire early.

What do you need to consider financially to make this happen?

For some insights we turn to a recent Forbes article that asks “Should I Roll My Old 401(k) To An IRA If I Want To Retire Early?”

Short answer? You may want to not roll your company 401(k) into a separate IRA.

Why?

You could limit your withdrawal options.

With very limited exceptions, if you make withdrawals from a traditional IRA before you turn 59½ there is a 10 percent penalty.

Ouch.

However, the IRS lets employees make withdrawals without penalty from their company 401(k) if they leave the company at age 55 or older.

If you were to retire at 55 and rolled over your 401(k), then you would need to wait 4½ years to withdraw your funds and avoid a penalty.

With traditional 401(k) or IRA, you will pay income taxes on any withdrawals.

Why?

Your money was not taxed when you made the contributions and it has grown tax deferred.

The IRS will then collect taxes on your money later when you make withdrawals at ordinary income rates.

Alternatively, are there other reasons to keep your 401(k)?

Yes.

It will simplify your investments and keep them safe.

If you qualify for a Roth IRA, you could use a "backdoor" Roth IRA.

This should not be attempted without the help of a tax or financial advisor.

Financial planning for retirement should not be taken lightly at any stage.

If you are nearing retirement, you should be especially wise with your money.

Working with an experienced estate planning attorney and financial planner can help you make the right choices for your specific circumstances.

Reference: Forbes (August 31, 2018) “Should I Roll My Old 401(k) To An IRA If I Want To Retire Early?”

How Can Taxes Change After My Spouse Dies?

Your taxes could increase as a widow or widower.

No one likes to think about his or her own death.

It can be even more uncomfortable to consider the death of a spouse.

Unfortunately, it is something you should consider.

According to a recent Kiplinger article titled “How Losing a Spouse Could Boost a Survivor's Taxes,” a lot will change when your spouse dies.

The bitterness of loss will be made worse because you will likely take a financial hit.

How?

First, you will lose income.

Instead of receiving two Social Security payments, you will receive just one.

Yes.

And it will be the larger of the two incomes, but it will still be a single income.

If you were not included in the pension benefits for your spouse, you may lose this as well.

In addition to loss of income, you will have an increased income tax.

Why?

You will be filing under single status rather than jointly.

More than half of your standard deductions would disappear.

As a result, you will have more taxable income.

With this greater income, you will be taxed at a higher rate.

Yikes!

Do you have money in tax-deffered accounts such as a traditional IRA, 401(k), or 403(b)?

If yes, then this money will be 100 percent taxable when you make withdrawals.

Are there any actions you can take to minimize this burden?

Yes.

If your spouse had a life insurance policy, you could use the payout to pay taxes on a rollover from a traditional IRA to a Roth IRA.

You should do this the year your spouse dies.

Why?

During this year, you can still file "jointly" as a married individual.

What good does rolling over to a traditional IRA make?

It will enable you to defer taxes on distributions after holding the Roth IRA account for five years.

Also, once you turn 70½, you will not have required minimum distributions.

This gives you more control over your taxable income.

The result?

Your tax bill will be reduced every year thereafter.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger (October 13, 2017) “How Losing a Spouse Could Boost a Survivor's Taxes”

How Should I Get Invest for Retirement if I was Relying on myRA?

There are still options for retirement savings without the myRA program.

Were you solely using myRA to plan for retirement?

If so, do not be discouraged.

You can still save for retirement.

According to a recent Kiplinger article titled “Say Goodbye to MyRA, Hello to Roth IRA,” there certainly are other means for retirement saving.

 

In fact, in the grand scheme of time, the myRA program has not existed very long.

Created by the Obama administration, the myRA was designed to help people without employee-sponsored 401(k)s invest for retirement.

It was available for those with a low income as well as those who made six figures.

Now the U.S. Treasury has decided to end the program.

It seems there was too little participation to justify the governmental bureaucracy to administer it.

What should you do?

Do not cash in your myRA.

Why?

You could incur taxes.

You could also receive a penalty for early withdrawal if you are under age 59½.

Plan a rollover instead.

Set up a Roth IRA and move the funds over.

What about if you do not do a direct transfer?

You may still be able to avoid a penalty and taxes if you redeposit the full amount into your new Roth IRA within 60 days.

Set up automatic savings.

With your new Roth IRA set up automatic deposits for every pay period.

The Roth IRA will allow your money to grow tax-free.

There are rules for Roth IRAs.

• You can only deposit up to $5,500 ($6,500 if you are age 50 or older) each year as of 2017.
• You cannot contribute more than you make.
• If you have had the account for longer than 5 years, you can withdrawal your contributions at any time without a penalty.
• If you have had the account for longer than 5 years and are older than age 59½, all withdrawals are tax-free.
• With Roth IRAs there are contribution limits ($118,000 if single and $186,000 if married and filing jointly in 2017).

Whatever you choose to do, the best thing you can do is start saving now.

Reference: Kiplinger (August 2017) “Say Goodbye to MyRA, Hello to Roth IRA”

How can I Lower My Tax Bill during Retirement?

By making wise decisions, you could keep more money.

Taxes are a fact of life.

If you make money, chances are you will owe the government at some point in your life.

And taxes do not end in retirement.

Still, according to a recent Kiplinger article titled “Retirees, Cut Your Taxes With These Moves,” you may be able to minimize what you owe.

Forms.

Are you an investor?

Do you have taxable income up to $37,650 if filing alone or $75,300 if filing jointly?

If yes, you could receive a zero percent tax rate for your long-term capital gains.

Sounds good.

But how?

You will need to report your profits on Form 8949 and then carry them over to Schedule D.

The zero percent rate will be applied to the appropriate profits.

Standard Deduction.

Are you 65 years of age or older?

Your standard deduction will be greater than those for younger individuals.

The normal deduction is $6,300 if you are single and $12,600 if you are married.

If you are 65 or older, the deduction grows to $7,850 for singles, $13,850 if your spouse is younger than 65, and $15,100 if your spouse is older than 65.

You can save money and time itemizing, if the total of this standard deduction is greater than your itemized deduction.

Medicare Premiums

Are you self-employed?

If so, you are not limited by the deductible cap of 7.5 percent of your adjusted gross income for your Medicare expenses.

IRAs.

Are you married?

Is your spouse still working?

If yes to both, then he or she can contribute to your IRA.

If you were younger than 50 last year, you will be limited to a $5,500 contribution.

On the other hand, if you were 50 or older, then your limit is $6,500.

Is there an maximum age limit?

This depends on the type of IRA.

Do you have a traditional IRA?

If yes, you can make contributions up until you are 70½.

Do you have a Roth IRA?

You have no age limit.

As long as your spouse is earning enough to fund your account as well, he or she can make contributions.

Maximizing retirement income takes planning.

Start now.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger’s (March 2017) “Retirees, Cut Your Taxes With These Moves”

Are There Specific Rules Regarding 401(k) Distributions?

If you are married, you have limited control over who gets your 401(k) distribution.

In short, your spouse receives all of your 401(k) if you die.

All of it.

It is the law.

A recent Kiplinger article, titled “What Happens to Your 401(k) When You Die–Like It or Not,” explains this law was signed by Ronald Reagan in 1984.

Why?

He wanted to protect the rights of a spouse so his or her partner could not sign away his or her survivor rights in retirement funds.

What are the specifics?

The rights of the survivor cannot be overturned by a mere contradictory beneficiary designation.

The only way this would not hold true is for the spouse to waive his or her right in writing.

Note: Waiving a right cannot be in a prenuptial agreement because a spouse must waive the right.

Again, if you are married, the right can only be relinquished with a signed waiver in writing.

What if it is an annuity?

If a retirement plan payout is taken as an annuity, the worker must have a plan designated to pay at least 50 percent of the original benefit amount to the surviving spouse.

Are there loopholes?

Yes.

The would-be surviving spouse has less protection while the account owner is alive.

How so?

If the account owner leaves his or her job, the account owner may roll over up to $1 million to an IRA.

There are no death benefit protection rules governing IRAs for surviving spouses.

IRA beneficiary designations are contingent on whether your state is a community property or joint property state.

In community property states, permission from your spouse may be required you if plan to leave more than 50% of your IRA to a third party.

Otherwise, you can select whomever.

Although some plans require spousal permission for rollovers or certain distributions, it is uncommon with 401(k) plans.

The takeaways?

Know the rules for your own 401(k) and those governing the plan of your spouse.

Also, if your single, none of this applies to you.

You can select whomever you wish.

Remember: “An ounce of prevention is worth a pound of cure.” When making your financial, tax and estate plans, do not go it alone. Be sure to engage competent professional counsel.

For more information about estate planning in Overland Park, KS (and throughout the rest of Kansas and Missouri), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Kiplinger’s (August 2016) “What Happens to Your 401(k) When You Die – Like It or Not”

Inheriting Inherited IRAs

Survivors and widows have a number of pressing issues to consider. It always has been that way. Now, however, their lot is even more difficult as more is at stake, to include mistakes regarding IRA "gotchas."

Unfortunately, not giving due attention to an inherited IRA can be a big mistake to pay for down the line.

The problem is the IRA rollover penalty. In fact, The Wall Street Journal rates it as one of the biggest mistakes a surviving spouse can make. The standard advice is for a surviving spouse to roll over an decedent's IRA into their own IRA. However, especially in light of current events, this might be a rule of thumb to avoid until you've weighed your own options.

IRAs are tricky and getting increasingly trickier. Not to mention the reality that an ever increasing amount of personal wealth is being held and passed down in the form of IRA investments at this time of incredible market volatility. If you are at or over age 59, then an IRA rollowver may not be a bad idea (since you'll have access to the IRA funds shortly anyhow).

Nevertheless, a great many spouses will receive an IRA before that age and it's not usable wealth to cover all sorts of new expenses, unless you pay the 10% to make early withdrawals. Instead, the IRA could simply be inherited and remain in the name of the decedent. On the downside, this approach would require taking regular and taxable withdrawals on the account right now.

In general, a great deal of thought should go into how to best "inherit" an IRA. The Wall Street Journal article goes on to mention a few other survivor mistakes, along with some interesting statistics about IRA rollovers.

Reference: The Wall Street Journal (November 12, 2011) "Survivors’ Biggest Mistakes"