Kansas and Missouri Estate Planning

Do I have Enough Moola to Retire?

The need for money does not disappear in retirement.

You cannot predict the course your life will take.

The Great Recession took jobs and retirement savings from many Americans.

When life knocks you down, you do not need to stay there.

According to a recent Consumer Reports article titled “Will you have enough money to retire?,” you can adjust and still have a financially sound retirement.

What can you do?

Review finances.

You bring home a paycheck.

You also have taxes, deductions, and bills.

Calculate how much money you have after these expenses.

This will help you know how much you have available to save.

Cut the fat.

Evaluate what expenses you need.

Compare the costs and consider switching providers.

A little bit can go a long way.

Pay off debt.

You do not want to carry debt into retirement.

Start with the highest rate debt first.

Reconsider big ticket items.

Purchase a used car rather than a new vehicle.

Choose a vacation close to home rather than traveling far away.

Move to a smaller home.

Prioritize retirement savings.

Does your employer provide matching benefits for retirement contributions?

Take advantage of this.

It is free money.

What if you are self-employed?

Set up your own IRA or solo 401(k).

These accounts are off-limits until retirement.

Stay employable.

Do not let your current certifications or licenses lapse.

Never stop learning.

If you can meet future needs, you may continue to work if you need more money for retirement.

Incorporating these strategies into your financial plan will set you up for a more relaxed retirement.

Reference: Consumer Reports (August 29, 2019) “Will you have enough money to retire?”

What Should I Know About Roth IRAs?

Roth IRAs can be an amazing tool in retirement planning.

You know you need to plan for retirement.

You are not sure where to start.

There seem to be so many options.

You are not wrong.

According to a recent the balance article titled “9 Surprising Facts About Roth IRAs,” certain people will find Roth IRAs are a great option.

Why?

Roth IRAs can serve as emergency funds.

Emergencies come when you least expect them.

Emergencies are often expensive.

What happens if you do not have enough money in your checking or emergency fund to cover an unplanned cash call?

Are you out of luck?

Not necessarily.

If you have money in a Roth account, you could make withdrawals for these emergencies.

Would it trigger a penalty?

Not necessarily.

Why?

The contributions made in a Roth are not deductible.

If the money you take out does not exceed the amount you put in, you can make withdrawals without penalties or taxes.

Translation?

This means if you put in $5,000 and it grows to $6,000, you should only take $5,000.

You could use a non-deductible IRA to fund a Roth.

There are income limits governing eligibility for a Roth IRA.

However, there may be an option for a “backdoor Roth.”

What is this?

It happens when money inside a non-deductible IRA is converted into a Roth.

Does it sound complicated?

It can be.

Do not try doing it yourself.

Work with an experienced professional.

Mistakes can be quite costly.

You may roll after-tax 401(k) contributions into a Roth IRA.

Do you have an employer sponsored IRA?

At retirement, could can role these after-tax contributions into a Roth IRA.

What about the investment gain?

No.

This is not included in the deal.

Stick to the contributions.

Roth IRAs have no RMDs (Required Minimum Distributions).

For traditional IRAs you will be required to take minimum distributions once you reach a certain age.

With a Roth, there are no required minimum distributions because you already paid the taxes on the money contributed.

If you leave the account to a non-spouse, the heir will need to take distributions though.

You can contribute to both a SIMPLE IRA and a Roth IRA.

If you meet income requirements, you can contribute to SIMPLE IRAs and Roth IRAs.

Your SIMPLE IRA contributions will be tax deductible.

The Roth IRA contributions are not tax deductible.

These could allow you to get a tax break now and later.

This is especially beneficial if you are self-employed.

Your employer plan may allow Roth contributions.

If your employer offers a 401(k) with Roth contributions, it would be beneficial.

It is best to ask your HR department for specifics regarding your options here.

Age is not the key factor in determining whether to use a Roth IRA.

Income is important when determining whether a Roth is right for you.

If you expect your income be in a lower tax bracket in retirement, a traditional IRA may be better.

If you will be in the same or higher bracket, a Roth would be a wise option.

You might be able to make a spousal Roth contribution.

If you earn an income and your spouse does not, you can make contributions to a Roth IRA on their behalf.

This will increase your overall retirement savings as a couple.

Be careful about Roth conversions.

This is not DIY planning. Get help from an experienced professional.

He or she will help you to devise a strategy to best meet your retirement needs and goals.

Reference: the balance (August 13, 2019) “9 Surprising Facts About Roth IRAs”

 

Are the Self-Employed Retirement Ready?

The self-employed need to intentionally plan for retirement.

You are an entrepreneur.

Being self-employed, you are your own boss.

You have responsibilities.

Lots of them.

According to a recent Think Advisor article titled “Many Self-Employed Americans Aren’t Saving Enough for Retirement: Transamerica,” you should not neglect your retirement planning in the midst of these demands.

Even if you are one of the 62 percent of self-employed Americans who want to continue working when they retire, you still need to prepare financially for retirement.

Just because you plan to continue working does not mean you will be able to do so.

You may not be able to work due to medical reasons or the job market.

About 15 percent of self-employed Americans are saving nothing, zippo, zilch for retirement.

Thirty percent are only saving infrequently.

Many self-employed take early withdrawals or loans from their retirement accounts, too.

Yikes!

About 70 percent of self-self-employed individuals are expecting a majority of their income to come from Social Security.

Spoiler alert: Social Security alone will not be sufficient tofully fund retirement.

Fewer than 40 percent plan to use 401(k)s, 403(b)s, or IRAs for income.

Do not be unprepared.

Take advantage of IRA and Roth IRA accounts.

Depending on your situation, you may want to consider a Solo 401(k).

Start saving now to set yourself up for success in retirement and contact an experienced financial planner.

If you need a referral, then ask your estate planning attorney.

He or she likely knows those to consider and those to avoid.

Reference: Think Advisor (July 29, 2019) “Many Self-Employed Americans Aren’t Saving Enough for Retirement: Transamerica”

How do I Prepare for Income Taxes in Retirement?

Income taxes are applicable even without your day job.

You may elect not work in retirement.

You may simply enjoy families, hobbies, and volunteering.

Accordingly, you will not earn a paycheck.

According to a recent Market Watch article titled “How 401(k) savers can avoid a nasty surprise come retirement,” you will still owe income taxes.

This is no joke.

Keep reading.

If you have a traditional IRA or 401(k), you will owe taxes on withdrawals regardless whether they are part of your Required Minimum Distribution.

Does this mean you should not make contributions to your retirement plan while working?

Absolutely not.

You do received a tax benefit when the contributions are made.

The contributions are not "tax-free," however.

Rather taxes are deferred to the time you take withdrawals from the account.

When planning for retirement and calculating what you need, be sure you take the tax consequences into account.

For example, if you have $1 million in an account, you may only have $700,000 after taxes.

No one knows or can predict future tax rates.

As a baseline plan on 20 percent at the federal level and 3 to 10 percent at the state level.

To maximize the money in these accounts, be sure to delay withdrawals until after you turn 59½.

Why?

You will pay a penalty on any withdraw taken before this age.

What a waste.

If you plan to work and take withdrawals, this could put you in a higher tax bracket and require you pay more money in taxes or Medicare premiums.

If you plan to work in your 60s and 70s, delay withdrawals as long as possible.

If you can wait until you are 70½, you likely will maximize your retirement fund accumulations as this is the age when you must begin taking your Required Minimum Distributions.

A little strategy can go a long way in maximizing your savings and minimizing your tax liability.

Reference: Market Watch (June 3, 2019) “How 401(k) savers can avoid a nasty surprise come retirement”

What are Some Financial Considerations When Age 59½?

Aging can be less stressful with a little bit of planning.

With each passing day you grow older.

Some people fear aging.

Others do not.

If you are age 59½, then 60 is just around the corner.

You do not need to dread this milestone.

According to a recent Kiplinger article titled “What Should You Do When You Turn 59½?,” you can take steps now to make your retirement years more enjoyable.

What can you do?

Consider your 401(k).

When you turn 59½, your relationship with your retirement account shifts significantly.

How so?

You can begin making withdrawals without incurring penalties.

This can be helpful and provide more flexibility as you make payments.

Act wisely.

Do not spend it all at once.

Set up a safety net.

Emergencies funds are important at any age.

Things happen unexpectedly.

Your 401(k) can now help serve as a safety net.

Does this mean you should ditch your other emergency funds completely?

No.

You may find it easier to access money in the other accounts, but these need not be your only source of a safety net.

Make of catch-up contributions.

You are eligible to set aside more into your retirement accounts.

Both your personal IRA and employer-sponsored accounts are included.

This can have a double benefit of decreasing taxable income and thus saving your money from current taxation.

Research in-service rollovers.

The open market has more investment options than 401(k) plans.

You may now be able to rollover some of your 401(k) funds into an IRA while you are still employed in the same position.

What does this accomplish?

It allows you to have more control over the funds both in investments and in withdrawals.

Evaluate your spending.

Do you know where your money goes?

If not, you are shooting blind.

Knowing what you spend now will help you calculate what you will need in retirement.

You can create a retirement budget now to see how much longer you will need to work to achieve your desired lifestyle.

Do no neglect health care.

You will still need health insurance.

You cannot access Medicare until age 65.

If you retire earlier, you will need to know your options for coverage until you are eligible for Medicare.

Taking steps now to set goals and plan for the future will usher in a far more stable and enjoyable retirement.

Seek the assistance of a financial advisor well-experienced in retirement planning.

Reference: Kiplinger (June 28, 2019) “What Should You Do When You Turn 59½?”

How can I Help Protect My Retirement from a Recession?

Recessions are killer to retirements.

Do you remember 2008?

The recession hit many Americans hard.

That recession, like most, impacted those nearing or in retirement the most severely.

In fact, nearly $2.4 trillion disappeared from retirement funds for American almost overnight.

Yikes!

According to a recent Money article “This is the Best Way to Recession-Proof Your Retirement, According to Experts,” a similar situation in the future is not impossible.

In fact, future recessions should be expected.

Can you protect yourself in a downturn?

Do you look particularly fetching wearing a barrel and suspenders?

If no, you can certainly take steps to set yourself up to make it through without becoming destitute.

What are they?

Create a cushion.

Emergency funds are important no matter your life stage.

How much should you save?

The commonly recommended amount is to have at least three to six months of expenses saved, preferably in cold hard cash or its equivalent.

Even if your retirement savings are large, removing money early to survive will incur penalties and decrease future gains.

Keep your emergency funds separate, yet accessible.

Minimize debt.

In retirement, you will be living on a more fixed income.

You do not want to deal with debt or creditors, especially in a recession.

Start paying down your debt now.

To prioritize, start with the highest interest rate debt.

You can cut discretionary expenses to pay make these payments.

Also, in a recession, you can opt not to pay for a vacation, but a mortgage payment must be paid.

If you do not believe me, just blow off the mortgage payment for a few months.

You will need the barrel and suspenders, if you do.

Consider tweaking your investment portfolio

Your investment needs will change as you near retirement.

The closer you get to retirement, the less exposure you will want to market volatility.

If you have unnecessary risk, get rid of it.

You may still need some stocks to out-pace inflation, but you do not want too much where the risks are greater than the rewards.

Working with an experienced financial advisor can help you adjust accordingly.

Apply for part time jobs.

Having a job can give purpose to your day.

It can also provide funds so you do not draw down retirement accounts more quickly than necessary.

Working may impact taxes and Social Security, so you may want to research the impact before you accept a job.

Set up an estate plan.

A recession is not an excuse to neglect estate planning.

The heavy financial burden of a recession will be made worse for your loved ones if you do not have your affairs in order.

Taking steps to protect yourself now will only help you later should a recession rear its ugly head.

Reference: Money (March 13, 2019) “This is the Best Way to Recession-Proof Your Retirement, According to Experts”

Are "Stretch" IRAs in Jeopardy?

The Secure Act may change how people plan with IRAs.

The Secure Act bill passed the House vote and is now in the Senate.

What is the Secure Act?

It stands for “Setting Every Community Up for Retirement Enhancement Act of 2019.”

According to a recent Kiplinger article titled “Secure Act Calls for Changes to IRAs, RMDs,” the act will impact IRA planning.

How so?

It repeals the age cap.

What does this mean?

Currently, individuals can no longer make contributions to a traditional IRA after age 70½.

The new cap removes this limit.

What does this do?

It allows people to continue saving in their traditional IRA in much the same way as they are currently able to save at later ages into a Roth IRA.

How much can be contributed?

Those age 50 or older have a higher contribution limit of $7,000.

If your spouse is retired, you can also make contributions into an account on their behalf.

It increases the RMD age.

Currently, the age at which people must make required minimum distributions is 70½.

With the new bill, it would increase to age 72.

How does this help?

If you are able to cover expenses without tapping in to your IRA, you will not need to do so.

This will only help those who turn 70½ in 2020.

Why?

The bill would not go into effect until December 31, 2019.

Anyone turning 70½ in 2019 or earlier is subject to the old rules.

It negates the “Stretch IRA.”

While the new laws benefit the account owners and spouses, it does little to help non-spouse beneficiaries.

Why?

The heirs will no longer be able to stretch RMDs from IRAs they inherit.

What does this mean?

The RMDs will not be calculated based on the life expectancy of the heir.

Rather, all funds must be withdrawn within 10 years, subject to limited exceptions.

Larger accounts will require larger RMDs.

These larger RMDS will trigger a greater income tax bill for beneficiaries.

With these changes, you may want to review and update your estate plan.

Work with your experienced estate planning attorney to create a plan to satisfy your goals and the new laws.

Reference: Kiplinger (June 14, 2019) “Secure Act Calls for Changes to IRAs, RMDs”

What Taxes Should I Expect to Pay on My Inheritance?

Taxes on inheritances vary.

Someone who knows you and loves you had money.

He or she died.

Now you have received an inheritance.

What should you do now?

According to a recent Orange Town News article titled “Will I Pay Taxes on My Inheritance,” your actions are dependent on the type of inheritance you received.

Let us take a look.

Bank Savings Accounts or CDs.

If the account is not a retirement account, the federal government will not impose an income tax.

The federal government does not have an inheritance tax either.

Unfortunately, certain states will impose an "inheritance" tax.

These include Iowa, Maryland, New Jersey, Kentucky, Nebraska, and Pennsylvania.

Talk with an experienced estate planning attorney about the best actions to take.

Primary Residence or Other Real Estate.

Inheriting a home or real estate does not trigger taxes.

When you sell the property and home, you will may be taxed on capital gains.

Valuation is established on the day of death.

Let us say the value is $250,000 at the date of death and you wait to sell it.

When you do sell, the value has risen to $275,000.

The $25,000 gain must then be taxed.

The day you take ownership determines the cost-basis.

Life Insurance Proceeds.

These proceeds are not taxable as income.

There is an exception.

If interest is earned, you could owe taxes.

This occurs when the receipt of the proceeds is delayed.

The Form 1099-INT muse be filed by the beneficiary.

The interest will be taxable by both the state and the federal government.

If the proceeds are transferred to an individual before the insured dies, the proceeds are fully taxable.

There is another possible exemption: the value of the death benefit is included as part of your gross estate for determining federal estate taxes.

Consequently, if the amount of life insurance death benefit put you above the federal estate tax exemption ($11.4 million per taxpayer for 2019), then your estate may be subject to taxation.

Retirement Accounts: 401(k) and IRA.

Whether a traditional IRA is inherited or not, distributions are taxable.

Roth IRA distributions are not taxable, unless taken within five years of the IRA being established.

Laws for retirement plan distributions may change based on pending legislation.

And not for the better.

This means you should discuss options with your experienced estate planning attorney.

Some 401(k)s are taxed or will be taxable.

How much is the tax?

This depends on the particular rules of the 401(k) plan.

The distribution for some plans must be a lump sum.

If a spouse inherits, he or she may rollover into an IRA.

If not a spouse, the lump-sum will likely have to be taken and the resulting taxes paid.

Stocks.

Usually, capital gains are paid on gains made during the period of ownership post-inheritance. (See the hypothetical regarding real estate above.)

When inherited, cost basis is determined from the fair market value on the date of death.

Artwork and Jewelry.

If assets like jewelry, artwork, rare stamps, books antiques, and coin collections are inherited, they will trigger a tax on the next gain at sale.

The rate is higher than most capital gains assets.

Instead of 15 or 20 percent, the capital gains rate is 28 percent.

Valuation like other assets is determined on date of death or the alternate valuation date.

Before accepting your inheritance, you should discuss the inheritance and the tax liability with your attorney.

This will help you have a better understanding of your situation and how your choices will impact your finances.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

Are Charitable Distributions from IRAs Popular?

Charitable giving through IRAs is rising.

Are you over age 70½?

Do you have a non-employer retirement account, an IRA?

Are you strongly considering making charitable gifts through your IRA?

If yes, you are in good company.

According to a recent ThinkAdvisor article titled “Charitable Gifts From IRAs Shot Up by 74% in 2018,” a FreeWill survey of 120 nonprofits found Qualified Charitable Distributions to these nonprofits increased by 73.8 percent last year.

This shows increasing popularity with this method of giving.

Not only are more people giving, but the gift amounts have seen an increase.

A little over half of the nonprofits surveyed noted an increase in average gift amounts.

Only 12 percent reported a decrease.

What are the reasons for this trend?

One speculation is demographic changes with the 70 to 80 age bracket quickly growing.

Another is tax changes.

New tax laws make IRA charitable distributions appealing for those older than age 70 ½.

Why?

The itemized deductions and charitable deductions will not apply due to the increased personal exemption, making the IRA distribution appealing for its tax benefits.

It can also satisfy the required minimum distribution imposed by the IRS.

Sounds like a great win-win option, right?

Why then might some people not choose to make Qualified Charitable Distributions?

For most charitably-minded people it is oftentimes just a lack of understanding.

The process can be confusing.

Some people may not even know it is an option.

How do you solve for this?

Take time to discuss this option with your estate planning attorney, financial advisor, and IRA custodian.

Once you have the answers, you will be able to move forward with confidence.

Reference: ThinkAdvisor (May 6, 2019) “Charitable Gifts From IRAs Shot Up by 74% in 2018”

What Happens if I Make a Mistake on My RMD?

Consequences for RMD mistakes vary based on circumstances.

You made a mistake.

You calculated your required minimum distribution for your retirement account.

The problem?

You or your brokerage firm made a mistake.

The figure was too low.

You did not withdraw enough.

What can you do now?

According to a recent Kiplinger article titled “How to Correct a Mistake on Your RMDs from IRAs,” you should contact the IRS immediately to see if they will waive the 50 percent penalty.

You read that correctly.

The penalty is 50 percent of the amount you should have taken.

Calculate the exact amount you should have withdrawn.

Once you have done this, this withdraw it immediately.

Next, you will need to file Form 5329.

If you miscalculated more than one year, you will need a separate form for each year.

Lines 52 and 53 should be filled out with the number you should have withdrawn and the letters “RC”.

What does “RC’ mean?

“RC” means reasonable cause.

On the dotted line next to 54, write the amount of the penalty for which you are requesting the waiver.

If the issue was due to a brokerage firm error, include a short note explaining what happened and how you took corrective steps immediately upon discovery.

The IRS does not need all the details.

Keep it brief.

Wait to send any penalty money until the IRS accepts or denies your penalty waiver request.

If the broker sent a letter informing you of their mistake, keep it in your files.

This note should not be sent to the IRS.

Mistakes happen.

To make them is human, to forgive is divine.

More information on the process can be found in the Instructions for IRS Form 5329.

Reference: Kiplinger (March 22, 2019) “How to Correct a Mistake on Your RMDs from IRAs”