Kansas and Missouri Estate Planning

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 can I Tame Taxes in Retirement?

Taxes are an unpleasant reality in retirement.

In retirement, you rely on the money you saved to become your income.

These sources could take a serious tax hit.

According to a recent Forbes article titled “Want To Cut The Taxes In Your Retirement Money?,” this can be minimized.

How so?

First, you need to understand different investments and how they are taxed.

Interest on CDs is taxed at your marginal tax rate.

This rate could be as high as 39.6 percent.

You could also use a tax deferred account to save for retirement.

A 401(k) or traditional IRA would fall into this category.

How are these taxes handled?

The savings will be not be taxed when deposited.

Instead, they will grow tax-free until you make withdrawals.

They will be taxed at your ordinary income tax rate at the time of the withdrawals.

How much can you contribute to these accounts?

For an employee sponsored account, you could save up to $18,500 each year.

Are you older than 50?

If so, you can contribute an additional $6,000 each year.

The amount you can save in a traditional IRA is far less.

These are capped at $5,500 per year with just a $1,000 catch-up contribution for those over age 50.

Not surprisingly, there are several rules specific to retirement accounts.

Withdrawals from these before age 59½ with incur a 10 percent penalty.

On the other hand, you will be penalized if you do not take your full Required Minimum Distributions (RMDs) after age 70½.

The penalty, you ask?

The penalty is 50 percent of the RMD you should have withdrawn, plus the income taxes on same.

Yikes!

Are there other options?

Possibly.

You may be eligible to save in a Roth IRA or a Roth 401(k) account.

If you make above a certain amount annually, you will be ineligible for one of these accounts.

With Roth IRAs or Roth 401(k)s, your deposits will be made after taxes.

This means your earnings and your withdrawals will not be taxed when withdrawn, unless you trigger a penalty.

You may still receive a penalty if you make withdrawals before age 59½.

However, this will only happen if you remove more than you contributed.

As you can see, there are several tools at your disposal for retirement planning.

Working with an experienced estate planning attorney and financial advisor can help you create a plan to best meet your tax-efficient retirement objectives.

Reference: Forbes (August 10, 2018) “Want To Cut The Taxes In Your Retirement Money?”

Can I Trade Options in My Roth IRA?

There are restrictions in Roth IRA trades.

Roth IRAs are a great tool.

How do they work?

They allow you to pay taxes on your contributions.

This means you do not have to pay taxes on future gains or withdrawals.

If your taxes could be higher after you retire, this is especially beneficial.

According to a recent Investopedia article titled “Trading Options in Roth IRAs,” even Roth IRAs have their risks as well as their rewards.

If people choose to use options, there will be greater risk than traditional bonds, stocks, and mutual funds in Roth accounts.

Why?

They are able to lose their full value.

How?

This happens when the security price does not reach the strike price.

If they are risky, why would you use them?

They can be useful in hedging long stock positions against short-term risks.

How so?

They can lock in the right to sell at a certain price.

If an investor wants to sell stock, covered call option strategies can generate income.

Higher risk strategies are not allowed in Roth IRAs.

Why?

Roth IRAs are for saving for retirement rather than creating tax shelters.

The IRS makes these prohibited transactions known in the IRS Publication 590.

What are some of them?

The Roth IRA assets cannot be used for loan security.

Front spreads, VIX calendar spreads, and short combos are also off limits.

The extent of regulations and restrictions may depend on brokers.

If a broker is allowed some of these strategies, the strategies traditionally requiring margin are permitted with limits.

Roth IRAs are not typically designed for active trading.

Although it may be permitted with certain brokers, these should be approached cautiously.

Be sure to work with an experienced financial planner to determine whether options would be a benefit or hindrance to your retirement strategy.

Be sure your actions are within the legal limits.

That is a given.

Reference: Investopedia “Trading Options in Roth IRAs”

What Should I Know About Roth IRA Rules?

Roth IRAs are a excellent option for retirement savings, if you qualify.

Retirement saving can be daunting.

You know you need money to live in retirement.

You just may not know the best way to get there, as it can all be rather confusing.

According to a recent Investopedia article titled “Roth IRA Contribution Rules: The Basics,” a Roth IRA is a beneficial tool.

With a Roth IRA, your contributions will not be tax deductible.

It is a case of delayed gratification.

There are qualifications you must meet to contribute to a Roth IRA.

Right out of the chute, you will need to be earning an income.

The, if your income is too high, a Roth IRA will not be an option.

On the bright side, if you qualify, you can contribute a Roth IRA at any age.

You cannot have a joint Roth IRA account.

Interestingly, however, it is possible to make contributions to an account opened for a non-working spouse.

What is the maximum contribution you can make in a year?

In 2018, the amount is $5,500 for those under age 50.

If you are 50 or older, you can contribute up to $6,500.

The contributions are phased out as the Adjusted Gross Income increases.

What are some benefits of a Roth IRA?

Your money will grow tax free and any withdrawals will also be exempt from taxes.

There are a number of ways to use a Roth IRA.

You can make contributions from a taxable retirement account without being counted against the contribution limit.

Your contribution may still be decreased because the amounts taken from your traditional account may change your adjusted gross income.

You can also rollover from one Roth IRA to another without incurring contributions.

Although you do not have to report your contributions on your federal tax return, you can may want to keep records of your contributions.

Why?

This can be helpful in providing proof of five years of contributions.

Only after five years can your withdrawals be taken tax-free.

Work with an experienced financial planner to determine whether a Roth IRA will be a beneficial tool for you and your loved ones.

Reference: Investopedia “Roth IRA Contribution Rules: The Basics”

What do I Need to Know About Taxes on My Social Security?

Social Security is not always exempt from taxes.

You are entering retirement soon.

You expect to receive Social Security benefits.

Did you know Social Security can be taxed up to a rate of 85 percent?

Yikes!

Can you estimate how much might be subject to tax?

According to a recent Investopedia’s article “How to Avoid the Social Security Tax Trap,” taxable Social Security is based on a formula.

You can add up your gross income with certain adjustments.

Where do you find this?

It will be the amount on line 21 of Form 1040.

You must then add back any excluded income.

This includes foreign earned income, U.S. Savings bonds used for higher education, and employer adoption benefits.

Next find the amount listed on Form SSA 1099 sent by the Social Security Administration.

The benefits are the gross amount listed in Box 3.

All tax-exempt interest from municipal bonds is listed on Form 1040 line 8a.

If you are below $32,000 if married and filing jointly, or $25,000 if single, head of household, widowed or married filing separately, you will not be taxed on Social Security.

If the income mix is between $25,000 and $34,000 for those for those filing as singles, you will be taxed at 50 percent.

If more than $34,000 it will be taxed at 85 percent.

What if you are married and filing jointly?

Income between $32,000 and $44,000 will be 50 percent.

If more than $44,000 it will be taxed at 85 percent.

There are exceptions.

What are they?

You will use a different formula if you or your spouse were covered by a qualified retirement plan through self-employment or another job or if you made deductible IRA contributions.

You will use IRS Publication 915, if you repaid any Social Security benefits throughout the year.

If you received benefits for a previous year, this year you will use worksheets in IRS Publication 915.

You may want to convert a traditional IRA to a Roth IRA and pay taxes on it this year.

Why?

You will not need to take any Required Minimum Distributions on the money in the future.

This will give you more control in keeping your income lower and below the taxable level.

In addition to federal taxation, your state may also tax Social Security.

Only thirteen states fall into this category.

Seven of these states have rather high thresholds for taxing benefits.

This means you may not be taxed even if you have reside on one of these states.

Fortunately, Kansas and Missouri are both states with a high threshold.

There are other states where those who qualify for federal taxation will also be taxed by the state.

You may want to avoid these states in retirement.

They include Minnesota, Vermont, North Dakota, and West Virginia.

Work with an experienced estate planning attorney and certified financial advisor if you have questions about tax-effective planning.

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: Investopedia (March 13, 2018) “How to Avoid the Social Security Tax Trap”

Is Buying a Home with My Retirement Funds a Good Idea?

Buying a home with retirement savings can be done with planning.

You have found a home you love.

It is your dream home.

And you followed the "three rules" of real estate: location, location, location.

It has the perfect location.

It has all the right amenities and layout to allow you to safely age in place, too.

You want to purchase it.

Now.

According to a recent Forbes article titled “Should You Use Your Retirement Savings to Buy a Home?,” you may be able to use your retirement funds in your down payment.

If you use a traditional IRA, you can withdrawal up to a $10,000 lifetime limit for a first time home purchase without being penalized for early withdrawals.

What if you have purchased a home before?

If you have not lived in a home you owned in the past two years, you are considered a first-time homes buyer by the IRS.

No, really.

What if you are married?

You and your spouse both must satisfy this requirement.

This can impact second marriages, especially later in life.

Note: you will be still be subject to income taxes on any funds withdrawn.

What if you have a Roth IRA?

If you have had this account for at least five years, you could use this $10,000 withdrawal exempt from income taxes and penalties.

If you have owned this account for fewer than five years, you may be taxed on all or a portion of the amount withdrawn.

This Roth IRA homeowner exception applies after you have withdrawn all your contributions.

What happens if your retirement account is provided through your employer?

These rules do not apply.

You must qualify for a hardship withdrawal if you take out money from a 401(k), are not yet age 59½ and still working.

Buying a home does qualify, but you will be penalized and you will be taxed on withdrawals.

Do you want to avoid a penalty?

The 401(k) loan provision may be an option.

You will also need to prove that you have closed on the home.

If you want to use your home to provide equity for supplemental retirement income, you may lose your home if you cannot make loan payments.

Obviously, this is a risk.

You should seek the help of a professional financial advisor before you purchase the home.

He or she will help you determine the best course of action for reaching home owning and retirement goals.

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: Forbes (May 20, 2018) “Should You Use Your Retirement Savings to Buy a Home?

What are the Current Roth IRA Limits?

Saving in a Roth is a great idea, but it has its limitations.

You have a Roth IRA.

Or perhaps you are considering setting one up.

Either way, knowing the guidelines and rules for these accounts is essential.

According to a recent Kiplinger article titled “How Much Can You Contribute to a Roth IRA for 2018?,” some of these rules have changed from 2017 to 2018 while other have remained the same.

What are the rules for 2018?

For starters, the maximum contribution has not changed.

The amount is still $5,500—unless you are age 50 or older.

Once you hit age 50, you can contribute an extra $1,000 per year as a “catch up” amount.

But not so fast.

Not everyone can contribute the maximum amount.

The amount you can contribute is also determined by your income level.

If you are single, your adjusted gross income must be less than $120,000.

If you are married and filing jointly, your income must be less than $189,000.

If you are single with an income of $135,000 or are married and filing jointly with an income of $199,000 or more, you cannot contribute to a Roth IRA.

In addition to the rules governing Roth IRA contributions, you should also know those regarding withdrawals.

What are these?

They are different than those for traditional IRAs.

Traditional IRA contributions are tax-deductible.

Withdrawals from these accounts are taxed.

Contributions to Roth IRAs are taxed when made.

This means any withdrawals can be taken free of tax as long as you are at least age 59½ and have had the Roth IRA for at least five years.

Another difference involves required minimum distributions (RMDs).

What is the difference?

Traditional IRAs require individuals to take out a specific amount of money each year starting at age 70½.

No more contributions may be made at this point.

With a Roth IRA, there are no required minimum distributions.

You can also continue to make contributions as long you are still working.

A Roth IRA account can be a useful estate planning tool as well.

Why?

Although heirs—other than a spouse—will be required to make withdrawals over time, this money will not be taxed.

An experienced estate planning attorney will be able to help you maximize your Roth IRA in your estate plan.

So, how do you find an "experienced" estate planning attorney?

First, ask around. Friends, family and other professional advisors are trustworthy sources.

Second, conduct an "organic" search on "Google" for "estate planning" near you (e.g., "Estate Planning Anytown MoKan").

Third, either way, verify! Check out the education, experience, ratings and client reviews of any attorney before you contact him or her.

How?

Two helpful online resources are just a mouse click away to assist with your due diligence:  Avvo.com and Lawyers.com.

Check any Avvo ratings, client ratings/testimonials and attorney endorsements on Avvo.com and any "peer ratings" by judges/other attorneys and any client ratings/testimonials on Lawyers.com.

In fact, I use both of these services to thoroughly vett attorneys before referring members of our "client" family for legal help in other areas of law or for matters in jurisdictions outside Kansas or Missouri.

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: Benzinga (April 2018) “Life Insurance Costs and Payouts at Different Ages”

Are Roth IRAs Still a Smart Retirement Strategy?

Roth IRAs are still a relevant retirement savings tool.

You have heard about Roth IRAs.

You know they are different from traditional IRAs.

But how are they different?

What unique benefits do they offer?

According to a recent MarketWatch article titled “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions,” Roth IRA accounts present two significant benefits for some.

What are they?

Withdrawals are tax-exempt.

With a Roth IRA, you pay taxes on your income pre-contribution.

A traditional IRA defers your taxes on this income until you make withdrawals.

This means a traditional IRA is the strategy to use if you need a tax break upfront.

A Roth is beneficial tax-wise if you expect to have the same or a higher income in retirement.

For those expecting a lower income, a traditional IRA would make better sense.

There are a few rules for Roth withdrawals to qualify for this special treatment.

What are they?

First, your Roth IRA needs to open for more than five years.

Second, you need to be at least 59½, disabled or dead.

When does the five year countdown begin?

The clock starts on the first day of the tax year in which you make your initial contribution.

Does it matter how this initial contribution is made?

Nope, it can be a conversion or a regular annual contribution.

Account is exempt from RMDs.

Traditional IRAs require owners to take an annual required minimum distribution when reaching age 70½.

This is not the case with your Roth IRA accounts.

You can dip into them when you need the money, allowing it to continue to grow for you.

If money remains when you die, then it really shines as a great estate planning tool.

Why?

Withdrawals are not subject to income tax when taken by your beneficiaries, unlike with a traditional IRA.

How much can you contribute to a Roth IRA?

Contributions are limited each year to the lesser of two amounts.

The first amount is the annual contribution limit each year.

The second amount is your earned income for the year.

What is included in calculating earned income?

The math will include salary and wage income, bonuses, self-employed income, and alimony.

What are the rules if you are married?

You can include the amount your spouse earned in the income total.

How long can you contribute to a Roth IRA?

Contributions may be made after you turn 70½ -- provided you are still working.

Traditional IRA contributions end at age 70½.

Can you convert a traditional IRA into a Roth IRA?

Yes.

This is the fastest way to significantly fund a Roth.

By doing so your conversion will be taxable.

Converting before the end of the year will increase your income tax bill.

However, the federal income tax rates are low at this time.

Making a conversion now could be in your best interest.

If you have further questions regarding your specific circumstances, work with an experienced estate planning attorney or financial advisor.

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: MarketWatch (March 27, 2018) “How the new tax law creates a ‘perfect storm’ for Roth IRA conversions”

What Should I Know about Saving in an IRA?

An IRA is a valuable tool for retirement saving.

Have you begun planning for retirement?

Good.

As long as you hold a job, it is never too early to begin planning and saving.

IRAs can be a useful saving tool.

According to a recent Kiplinger article titled “2018 Retirement Contribution Limits for 401(k)s and IRAs,” 2018 may bring helpful IRS changes for some savers.

What are they?

401(k)s

With a traditional 401(k), you can invest and save pre-tax through an employer program.

What does this mean?

In short, you will not owe taxes on these contributions until you withdraw the money.

What are the annual contribution limits?

In 2018, they will increase by $500, going from $18,000 to $18,500.

Is this increase limited to 401(k) plans?

No.

The federal government’s Thrift Savings Plan, 403(b), and 457 plans will also see a contribution limit raised.

What if you are age 50 or older?

You can still contribute an extra $6,000 per year to catch up.

IRAs

You do not need to have a 401(k) plan from your employer to begin saving for your retirement.

An IRA is an "individual retirement account" through which people can invest for retirement.

Is there a limit increase?

No.

The limit will still be $5,500 in 2018.

What if you are age 50 or older?

The additional contribution limit will remain the same at $1,000.

When can you take advantage of this extra contribution?

If you turn 50 in 2018, you can make the full contribution any time after January 1.

Roth IRAs

Roth IRAs are unique because contributions are made post-tax.

Although you cannot claim a deduction on your income tax, these contributions will grow tax free.

Because tax has already been paid, you can withdrawal money without paying taxes.

Are there changes?

Yes.

The modified adjusted gross income limit for contributions has been raised.

Those who are singles or the head of the household and have a modified adjusted gross income less than $120,000 can make the maximum contributions to a Roth.

The contribution amount is completely phased out at incomes greater than $135,000.

For married couples filing jointly, the modified adjusted gross income must be under $189,000.

The contributions amount is completely phased out at incomes greater than $199,000.

With these changes, you may be able to save even more for retirement.

Retirement is not cheap.

Be sure to maximize your savings and investments as early as possible.

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: Forbes (October 31, 2017) “Managing Finances For A Loved One With Dementia”