Helpful miscellaneous articles
regarding our retirement plan and planning.
Like you, I review my retirement nestegg and plan from time to
time. Recently, I went though some
continued education for some credentials I maintain and it occurred to me that
we all could use a review about these issues.
So with your help, we will share and post articles and info that may be
helpful and of interest to many of you in this section.
Retirement tips: 8 ways to
start your year-end financial planning now
New Year's Eve is far away, but it's never too
early to organize your finances for the end of the year. Do it while
there’s still plenty of time to increase your retirement nest egg,
lower your taxable income and avoid tax penalties.
Here’s what experts say you should do:
Take your RMD
You generally must start taking withdrawals from your IRA,
SIMPLE IRA, SEP IRA or retirement plan account when you reach age 70½,
according to the IRS. And you must take your required minimum distribution, or
RMD, which is the least possible amount you must withdraw from your account
each year, by Dec. 31. This also applies to inherited IRAs and inherited Roth
IRAs, says Walter Pardo, founder and managing partner of Wealth Financial
Partners.
If you don’t take distributions, or they aren't large
enough, you’ll have to pay a 50 percent excise tax on the amount not
distributed. And don’t wait until the end of the year to take your RMD. Do it
in early December or late November, if not sooner, to avoid any chance of
having to pay the excise tax.
Too big?
Wayne Firebaugh, a certified financial planner, says it’s also
possible that retirement accounts can have too much money when they receive
excess contributions.
“Taxpayers often make excess contributions when they attempt to
roll over disallowed amounts such as their annual RMDs, or they disobey the
once-per-year, 60-day rules governing amounts withdrawn and then returned to a
retirement account.” (The IRA assesses a 6 percent penalty of the excess
contribution for each year it stays in the IRA.)
Charitable contribution
Retirement account owners over age 70½ might consider using
something called qualified charitable distribution (QCD) for some or all of
their RMD, Pardo says. A QCD to a qualified charity excludes the amount donated
from taxable income, and it can satisfy all or part of the amount of your RMD
from your IRA.
Consider tax-mitigating strategies
If you have a taxable account, examine your unrealized gains
and losses before the year ends.
“If I know there has been a capital gain established or going
to be taken, then I examine the portfolio for some positions with unrealized
losses that can be sold to reduce or eliminate the gain,” Pardo says.
Year-end distributions can also pose some problems for mutual
fund owners. “An investor buys a fund with nonqualified money," Pardo
says, "and then has to pay taxes on a huge capital gain distribution
that is paid end of the year.”
Consider waiting to purchase such a mutual fund until
after it distributes its capital gains, or consider buying a tax-managed fund
or ETF.
“It can really make a difference,” Pardo says.
Pay today for a tax-efficient tomorrow
Consider funding a Roth IRA as well as purchasing cash value
life insurance, which Pardo describes as two gifts of the tax code.
“They both can grow tax-free and the distributions are mostly
tax-free as well,” he says. “How much would you pay to lock in a 0
percent (tax rate) for your money’s future?”
A Roth IRA is a type of retirement savings account. According
to the IRS, you can contribute at any age if you (or your spouse if filing
jointly) have taxable compensation and your modified adjusted gross income is
below certain amounts. Your contributions aren’t deductible, but there are no
RMDs and the withdrawals and distributions – with a few exceptions – are
generally not taxable.
Consider, too, a partial conversion of your traditional IRA to
a Roth IRA. You’ll pay ordinary income tax on the amount of the distribution,
so Firebaugh recommends examining whether you have enough money to pay the
taxes due on the Roth IRA conversion. Also calculate the benefit of doing a
Roth IRA conversion to your current and future tax liability.
As for cash value life insurance, the National Association of
Insurance Commissioners’ (NAIC) Life
Insurance Buyer’s Guide notes that you can, “use the cash value to
increase your income in retirement.”
Review your beneficiary designations
Families inevitably change during a year because of marriage,
divorce, birth and death, Firebaugh says. His advice: Review
beneficiary designations every year to ensure that they reflect your current
desires about the distribution of retirement accounts at your death.
Kick the can down the road
Tax deferral is the most common way to grow money, Pardo
says. “It does not exempt taxes; it simply puts them off,” he says.
Consider funding your employer-sponsored retirement plan at
least as much as necessary to receive your company’s full match. Many companies
will match 50 percent of your contribution up to 6 percent of your
annual salary. “That is free money for you simply deferring pretax money,”
Pardo says. “Free money is the best kind of money, so don’t miss out.”
The contribution limits are $18,500 for 401(k)s and $5,500 for
IRAs. In addition, if you will be 50 or older anytime during 2018, you can make
an additional catch-up contribution of $6,000 to your 401(k) and $1,000 to your
IRA, Firebaugh says.
Pardo also recommends that
older investors with large retirement accounts consider purchasing a qualifying
longevity annuity contract, or QLAC.
“A QLAC can help older
clients with large IRAs to defer at least $130,000 of an IRA until age 85,” he
says. A QLAC is, in essence, a deferred income annuity that allows income to
begin beyond age 70½ without conflicting with RMD rules,
according to Fidelity Investments.
No job is finished until the paperwork is done
Financial firms send the IRS and you many forms, such as the
1099-R and the 5498, which report transactions in your retirement accounts.
“Unfortunately, these forms may tell an incomplete, one-sided story of your
transactions or even worse be inaccurate,” Firebaugh says. “In order to
protect yourself from the likely IRS inquiry, preserve your own documentation
for retirement transactions including rollovers and QCDs.”
For instance, if you failed
to withdraw money to satisfy your RMD in a timely manner, or you made an excess
contribution, be sure to include a Form 5329 with your regular tax return or
file it as a standalone form, Firebaugh says. “The Form 5329 self-reports
additional penalties that resulted from these sorts of retirement activities,”
he says.
“Failure to file the form
doesn’t mean the IRS will forget. It simply means that the statute of
limitations never starts so penalties and interest will continue to accrue and
your tax return is still subject to audit.”
Robert Powell is the editor of TheStreet’s Retirement Daily
www.retirement.thestreet.com and contributes regularly to USA TODAY. Got
questions about money? Email Bob at rpowell@allthingsretirement.com.
(As with any of these informative articles,
anyone who needs someone to talk to about
this
very subject contact me and I can direct you to a knowledgeable advisor).
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