New Rule for IRA Rollovers

 At some point in your life, you’ll most likely have to complete what’s known as an “IRA rollover”.  It’s a pretty straightforward concept.  If you have a 401k with an old employer or an IRA with a firm and you want to move what you saved to different management, you complete a rollover.  Paperwork is completed and funds are moved over to the new IRA.  Simple enough, right?  Usually.  Rollovers are usually simple to complete, but if the ball is dropped, it can result in substantial taxes and penalties that can lead to a less-than-pleasant situation. Recently, the plot has thickened due to an IRS ruling now limiting the frequency of IRA rollovers.

Trustee-to-Trustee Transfer 

To keep things simple, most rollovers are completed by way of “trustee-to-trustee” transfers.  Meaning funds are sent from one institution to another, without the investor ever “touching” the money.  This may happen electronically or a check might be issued to the investor, made payable to the new financial institution, not the individual.  You are able to complete an unlimited amount of these types of transfers during the year. 

60-Day Redeposit

The other type of rollover allows funds to be sent directly to you in your own name or electronically to a checking or savings account, but you must deposit the money into an IRA or eligible 401(k) within 60 days.  If the funds are not deposited within the 60-day window, the distribution will be deemed as a taxable event, which could cost investors a significant amount in taxes and penalties.  This type of rollover is only permitted once a year. 

Rollover Short-term Loan

As my colleague, Tim Wyman, explained in a recent blog, this 60-day rollover rule could also be used for a short-term loan.  So, if you were closing on a new home and needed some cash because your current home wasn’t sold yet, you could take a distribution from your IRA and, as long as you put the money back into the IRA within 60 days, there would be no tax consequences – essentially, a short-term bridge loan.  Previously, the 60-day rollover was permitted once every 365 days for each IRA you own. 

Stopping the Rollover Merry-Go-Round

Think about this:  If you had multiple IRAs, you could feasibly take a distribution from IRA #1 and use funds from IRA #2 to pay back the first distribution within 60 days.  The 60-day clock would then start over with IRA #2.  If you did this every sixty days, you would only need six different IRA accounts to do the 60-day rollover “merry-go-round” and give yourself an ongoing tax-free loan from your IRA.  However, the US Tax Court recently ruled that you are now only allowed one 60-day rollover every 365 days as an aggregate for ALL of your IRAs.  Meaning no matter how many IRAs you have, only ONE 60 day rollover is permitted in a 365 day time period. 

It seems as if our tax laws change faster than Michigan weather.  There is always something new and it’s important to work with an advisor who is up to speed on the ever changing landscape in financial planning.  If you ever have questions about your personal situation, don’t hesitate to contact us. We are here to help!

Nick Defenthaler, CFP® is a Associate Financial Planner at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-013208

Tax Update: Borrowing from Retirement to Buy a Home

There may come a time in your life when you simply need some money. As a general rule, taking money from an IRA, 401k, or other retirement plan for “non-retirement” purposes is ill advised.  However, there can be some exceptions.  Perhaps you bought a home without selling your current one and need funds to bridge the closing dates.  The IRS allows you to withdraw funds from an IRA and avoid income taxes and a 10% penalty (if under age 59.5) by rolling the money back into the IRA within 60 days.  This can be done once every 12 months. The gray area had been whether the 12-month rollover applies to each separate IRA or to all of your IRAs. In February 2014 a court ruling stated that this rule applies on an aggregate basis for all of your IRAs.  Therefore, the strategy can still be used, but proper planning will be even more important in order to make sure the transaction is nontaxable.

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. You should discuss any tax or legal matters with the appropriate professional. C14-011297

Avoiding Double Taxation of IRA Contributions

In my previous blogI described some of the rules surrounding making and deducting IRA contributions.   If you are over the IRS income thresholds, you can still make the IRA contribution, you just won’t be able to deduct it on your taxes – the contribution would be made with after-tax dollars.  This is where tax form 8606 comes into play. 

What is Tax Form 8606?

You are required to file Form 8606 when you make a non-deductible IRA contribution; this tax form will document the contribution amount for the current year.  It must also be filed with your taxes when you withdraw funds from an IRA in which non-deductible contributions were made.  If you don’t file this important tax form, when you go to withdraw funds you’ll face tax consequences. Any amount you contributed that did not receive a tax deduction (after-tax dollar contributions) will be treated as if it did, in fact, receive a tax-deduction and you will be taxed AGAIN on the money.  If you do file form 8606 properly, when you go to take a distribution, a portion will be taxable (any earnings) and a portion will not (return of original after-tax contribution). 

Is your head spinning yet?  Things get confusing quickly and mistakes can happen VERY easily when making non-deductible IRA contributions. Those mistakes could potentially result in double taxation of contributions that could cost investors substantial amounts of money over the course of their retirement.   Not many people want to deal with tracking contributions over the course of a career and will elect to not make non-deductible IRA contributions because of the potential administrative nightmare it can create.  

Non-deductible IRA Alternatives

So what else is there if you have additional funds to invest beyond maxing out a company retirement plan?  If your income is within the IRS limits, you could consider contributing to a Roth IRA.  As with a non-deductible IRA, contributions are made with after-tax dollars. However, all withdrawals, including earnings are not taxable if a qualified distribution occurs.  If income is too high for Roth contributions, you still might be able to contribute by utilizing the “back door” conversion strategy.  If you are phased out from the Roth because of your high income (a good problem to have!) and you don’t fit the mold for a Roth conversion, you could consider opening a taxable brokerage account. Those funds would not grow tax-deferred, but withdrawals would not be included in ordinary income like an IRA because you never received a tax deduction on the contributions.   

As you can see, there are many subtle nuances of different types of retirement and investment accounts.  Your planner can help you identify which accounts make the most sense for you based on your current and projected financial situation.  Working with someone you trust thoroughly to help you make these decisions is imperative and is something we deeply care about at The Center.

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. As Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional. C14-009867

Why You Can’t Always Take a Tax Deduction on an IRA

On deadline day for filing your taxes, you may be considering making last-minute Traditional IRA contribution.  Most people contribute to an IRA to 1) save for retirement and 2) take a tax deduction on the contribution to hopefully lower one’s overall tax bill.  Many people, however, are not aware that there is a good chance that the IRA contribution they are intending to make or have made in the past, does not allow for a tax deduction. This happens if you are above IRS adjusted gross income (AGI) thresholds.  Eligibility to deduct depends on income and whether or not you are covered under an employer sponsored retirement plan, such as 401k or 403b.

Married Filing Jointly

Both spouses are covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $96,000

Only one spouse is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $181,000

Neither spouse is covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

Single

Individual is covered under an employer sponsored retirement plan at work

• Income limit to be able to fully deduct an IRA contribution - $60,000

Individual is not covered under an employer sponsored retirement plan at work

• No income limit to be able to fully deduct an IRA contribution

There’s a reason the IRS limits the amount that can be deducted by someone who is covered under an employer retirement plan. The IRS tries to prohibit investors who are in higher tax brackets from sheltering “too much” income that won’t be taxed until funds are ultimately withdrawn upon retirement. 

You must also have earned income equal to or greater than the IRA contribution being made during the year in which the contribution will be coded.  For example, for someone to be eligible to make a full IRA contribution, their earned income from work throughout the year must be greater than or equal to $5,500, if under the age of 50, or $6,500 if over the age of 50.  Another important note – Social Security, pension benefits, IRA distributions, dividends, interest, etc. are NOT considered earned income items.  The IRS prevents retirees from contributing to qualified retirement accounts that grow tax-deferred unless they are working. 

In my next blog post, I’ll discuss ins and outs of contributing and withdrawing funds from an IRA where non-deductible contributions were made…this is where things can tricky.  Stay tuned. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. C14-009199

Retirement Strategies: Which Account Should You Tap?

 Receiving a pay check when you are in your working years is pretty straightforward.  You work hard each week, typically have a certain amount of federal and state taxes withheld, and you get paid.  Pretty simple, right?  Fast forward to the golden years of retirement, when you are no longer working for the income you receive, you are generally getting paid from the money from the portfolio you invested in over those hard-working years.  At this stage, the tax treatment of your “pay check” becomes a little more complicated.  With several different types of accounts and income sources, such as pension and Social Security, which account should you consider drawing the income from? Let’s take a look: 

Enjoying Life in the Go-Go Years

Take the example of a 63-year-old couple, just retired, and planning to enjoy a few years of extensive travel, golf and entertainment.  Spending is typically a little higher in these initial years of retirement. At The Center, we refer to them as the “go-go” years.  Both are receiving nice pension benefits ($100,000 total) and have collected Social Security ($40,000 total) at 62. The couple has their home paid off, live a healthy lifestyle and have very little itemized deductions and therefore take the standard deduction ($12,200) when they do their taxes.  They have both accumulated sizable IRAs ($750,000 total) and a joint taxable brokerage account of $250,000.  The clients would like to draw $60,000 from their portfolio for 6 years and begin to cut back once they are in their late sixties.  So what account(s) do we take the $60,000 from?  First off, let’s clarify the tax treatment between the IRA and joint account. 

The IRA: Any funds withdrawn from the IRAs will be treated as ordinary income and included in taxable income at the end of the year.  This is because the clients received a tax-deduction when they initially made contributions. 

The Joint Account: Withdrawals from the joint account on the other hand, will not be treated as ordinary income – the funds contributed to this account never received a tax deduction.  Unlike the IRA, however, the joint account does not grow tax-deferred and the clients will receive a 1099 each year showing capital gains or losses and any dividends or interest paid in the account. 

The Answer: If we take the full $60,000 from the IRA, the additional income will push them from the 25% tax bracket into the 28% bracket and a portion of the distribution would be taxed at 28%.  If the funds were taken from the joint account, the clients would not pay ordinary income tax on the distribution, thus keeping them in the 25% bracket and reducing their overall tax bill.

Everything in Moderation

Now let’s look at a different 63-year-old married couple living a much more modest lifestyle.  They do not have a pension and usually only live off the $40,000 they receive in Social Security benefits.  They also have a total of $750,000 between both of their IRAs and a $250,000 joint taxable brokerage account.  Their Social Security benefits are not taxable in this case because their AGI is under the IRS threshold. They still have a mortgage on their home and give money to several charities throughout the year which allows them to itemize their deductions ($25,000 total).  This year is an exception to their normal frugal lifestyle; they’d like to take $10,000 from their portfolio to go on a 10 day vacation to Hawaii. What account(s) should they take the funds from?  (Hint: Think of the difference between the tax treatment for the IRA and joint account from our previous example) 

The Answer: Assuming modest interest, capital gains and dividends from the joint account, they would feasibly be able to withdraw the $10,000 from the IRA and not pay any federal tax after factoring in their itemized deductions and personal exemptions, even though the IRA distribution was included in their ordinary income. 

As you can see from these examples, there is never a “one-size fits all” answer.  As financial planners, our team does just that, PLAN!  We take a close look at each client’s current and projected tax situation and coordinate with other professionals to make sure we are being as efficient as possible while getting you the funds you need to live the life you choose. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

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The examples provided are hypothetical. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment or withdraw decision. Please consult with your financial advisor about your individual situation. The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any tax matters with the appropriate professional. C14-007122

Health Care Costs: The Retirement Planning Wildcard

Planning ahead for retirement income needs, we typically think about how much it will cost us to live day-to-day (food, clothing, shelter) and to do those things we want to do, like travel and helping grandkids pay for college.  The costs we don’t often think about, those that could potentially wreak havoc on retirement income planning, are health care costs.  According to an October 2012 article from the Employee Benefits Research Institute, an average 65 year-old couple will need $283,000 to have a 90% chance of having enough money to cover health care expenses over their remaining lifetimes (excluding long-term care).

Longevity is a critical factor driving health care costs.  According to the Social Security Administration’s 2020 study, for a couple, both 66 years of age, there is a 1 in 2 chance that one will live to age 90 and a 1 in 4 chance that one will live to age 95.  Add to these longevity statistics the fact that Medicare is now means-tested, so the more income you generate in retirement, the higher your Medicare premiums.

So, what can you do to proactively plan for this potential large retirement cost?

1. If you plan to retire early, plan on the costs of self-insuring from retirement to age 65.  Some employer’s may offer retiree healthcare, or you can purchase insurance on the Health Insurance Exchange through the Affordable Care Act (these are still dollars out of your pocket in retirement).

2. Consider taking advantage of Roth 401(k)s, Roth IRAs (if you qualify), or converting IRA dollars to ROTH IRAs in years that it makes sense from an income tax perspective.  This will give you tax-free dollars to use for potential retirement health care expenses that won’t increase your income for determining Medicare premiums in retirement.

3. Work with your financial planner to determine if a vehicle like a non-qualified deferred annuity might make sense for a portion of your investment portfolio, again dollars that can be tax advantaged when determining Medicare premiums.

4. Most importantly, work with your financial planner to simulate the need for future retirement income for health care expenses.  Although you will never know what your exact need will be, providing flexibility in your planning to accommodate for these expenses may help provide you confidence for future retirement.

Contact your financial planner to discuss how you can plan to pay for your retirement health care needs.

Sandra Adams, CFP®is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are this of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Every investor’s situation is unique and you should consult with your financial advisor about your individual situation prior to making an investment decision. Please discuss any tax or legal matters with the appropriate professional. C14-005524

Back Door Roth IRA Conversion

A well-planned tax strategy has become increasingly important to investors, especially with overwhelming uncertainty of what tax rates could potentially increase to in the future. That’s why some investors look to Roth IRAs, a fairly new arrival to the investment world.  They were first released in 1997 and have become more and more popular.

A Quick Roth IRA Refresher

Contributions to a Roth IRA do not receive an immediate tax deduction like a 401(k) or deductible Traditional IRA.  However, earnings grow tax-deferred and if holding requirements are met, all withdrawals (including contributions and earnings) can be withdrawn 100% tax free.  Roth IRAs are an unbelievably attractive investment vehicle for those who believe they are currently in a lower tax bracket than they will be in retirement.  More specifically, young people, who are years away from their high earning years and wish to forego tax deductions (while most likely in the lowest tax bracket of their lifetime) now reap the benefits of tax-deferred growth and tax-free withdrawals upon retirement.  As a young person myself, I cannot stress enough how attractive the Roth IRA can be for investors if they fit the “Roth mold”.    

Who Is Right for a Roth?

There are income limitations on who can contribute to a Roth IRA.  For 2014, a married couple filing their taxes jointly must have an AGI less than $181,000 to be able to contribute the maximum to a Roth IRA. In 2014, individual contributions max out at $5,500, or $6,500 if you are over the age of 50.  The AGI limit for singles in 2014 is $114,000.  If you make over this income level, there is a tax “work around” in place that could still allow you to contribute to a Roth, depending on your personal situation.  Prior to 2010, there was an income limitation on who could convert Traditional IRA dollars to a Roth IRA.  Since 2010, theincome limitation has been completely lifted for conversions, meaning anyone, regardless of their income, can convert funds from a Traditional IRA to a Roth IRA.  This raised the eyebrows for number geeks like myself, who viewed this ruling as an excellent planning opportunity for clients. 

Lifting the Income Limit for Roth Conversions

The abolishment of the income limit on Roth conversions means that if you are over the income limit to contribute to a Roth IRA, you could open a Traditional IRA and immediately convert the funds to a Roth IRA.  There is, however, a catch to this “work around”.  The conversion would typically only make sense if the client did NOT have an existing Traditional IRA.  The tax calculation on the conversion gets very messy if the client does in fact already have a Traditional IRA and typically, it doesn’t make sense if they do.  One main point to also keep in mind is that employer sponsored plans such as a 401(k) or 403(b) are not taken into consideration like a Traditional IRA is when calculating tax due for completing the conversion.  

Back Door Roth Conversion Criteria

☑ If you are over the income limit to contribute to a Roth IRA ($181,00 for couples and $114,000 for singles)

☑ And you do not have an existing Traditional IRA because you are taking full advantage of employer retirement plans (401(k), 403(b), etc.)

☑ And you have additional funds to save

If you can check all three boxes above, the “back door” Roth IRA is something you may want to consider based on your individual situation and long-term goals. Since this is a fairly new planning opportunity, this type of conversion is something we are closely monitoring for our clients on an individual basis.  As with any financial decision, it won’t make sense for everyone.  But it is our job as your advisory team to walk you through your options and help you make a smart financial decision. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. C14-004799

Where Do I Take Cash From Next? The 72(t) Option

A longtime client, we will call her “Joan”, called last month needing to set aside money for her 2014 income needs. She had nothing left in the bank.  She had been through a life transition recently, out of work for over a year, and helping family with some health concerns.  Nearing retirement but not quite at the point at which she could access her retirement moneys without penalty (she was in her late 50’s, but not quite 59 1/2), she was concerned because her only choices were a Roth IRA and a traditional IRA.  So her normal reaction was to go for the Roth because it had fewer penalties or tax (she had established the Roth over 5 years ago and could access her contributed portion without penalty; she would likely experience a penalty if drawing on earnings portion). 

Penalty-free IRA Withdrawals

I offered a rarely used suggestion to establish a section 72(t) distribution (as authorized under the IRS tax code). This rule allows for penalty-free withdrawals from an IRA account. The rule requires that, in order for the IRA owner to take penalty-free early withdrawals, he or she must take at least five "substantially equal periodic payments" (SEPPs). The amount depends on the IRA owner's life expectancy calculated with various IRS-approved methods.

Rule 72(t) allows you to take advantage of your retirement savings before the age of 59 1/2, when there is otherwise a 10% penalty on early withdrawal. The withdrawals, however, are still taxed at your income rate.

How to Use Rule 72(t)

The substantially equal period payments must generally continue for at least five full years, or if later, until age 59 ½. For example, if you began taking payments at age 56 on December 1, 2006, you may not take a different distribution or alter the amount of the payment until December 1, 2011, even though your fifth payment was taken on December 1, 2010.

If you begin taking substantially equal periodic payments on December 1, 2005, and you turn 59 ½ on July 1, 2011, you may not take a different distribution or alter the amount of the payment until July 1, 2011.

This works well for Joan because she did not have any earned income in 2013 so we actually started her distribution in December for the 1st of 5 distributions.  We plan to take the next one immediately in January of 2014 and this should fulfill her income requirements needed for 2014.  She also does not plan on finding work in 2014 so the taxes on these dollars will be small since she had no other income.   The Roth arguably would also have fewer tax implications, but we suggested taking from the Roth IRA after this if additional income was needed in the year as she climbs the tax bracket wall.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.

Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. A 72(t) distribution may not be right for everyone. Investors should take into consideration the possibility of depleting their retirement account before the end of their life expectancy. In addition, any withdraws are taxed at the investor’s income rate and may raise their tax bracket. Please discuss any tax or financial matters with the appropriate professional before making a decision. #C14-001634

Ways to Maximize Social Security Benefits

 Recently I had the privilege of presenting at the Michigan Association of CPA’s continuing education conference on the topic of Maximizing Social Security benefits.  Social security is an important source of income for most of the estimated 58 million people who receive benefits.  Over my 22 years as a practitioner, I have tried to counsel clients to be sure to coordinate social security retirement benefits with their overall retirement plan.  As pensions (not just the City of Detroit) continue to become more obsolete, social security remains one of the few, if not only, guaranteed income sources for future retirees.

Following Ida Mae Fuller’s Lead

Before getting to how to maximize social security retirement benefits – how about a little fun social security history?  Do you know Ida Mae Fuller?  She is the first reported person to receive social security retirement benefits.  Apparently Ida went into the SS office after contributing a total of $24.75 over three years in payroll taxes and told the staff that she was retiring and didn’t expect to receive anything – but thought she might as well check. She ended up collecting $22.54/month and lived to age 100 – not a bad return on her contributions!

When to Begin Collecting Benefits

A traditional breakeven analysis works pretty well for single folks.  One of the best research articles that I have come across was in the Journal for Financial Planning and written by Doug Lemons.  Mr. Lemons outlined three main variables in the breakeven analysis: inflation/cost of living, income taxes, and time value of money. Mr. Lemons’ research addressed multiple variations and combinations.  The general rule based on his research is:

• The breakeven between taking at age 62 and 66 (assume full retirement age) is roughly age 78.  Meaning, you need to live past age 78 to be better off by waiting until age 66.
• The breakeven between taking at age 66 and 70 is roughly age 83.  Meaning, you need to live past age 83 to be better off. 

Social Security Analysis for Couples

The breakeven analysis breaks down a bit for couples (two life expectancies vs one). I have written about spousal benefits in the past.  In this post I’d like to provide two strategies for couples to consider.

File & Suspend Strategy

June Cleaver:  As you may know, June Cleaver of the “Leave it to Beaver” show was the classic stay-at-home mom.  Her husband Ward, who sometimes was known to be a “bit too hard” on their son the Beaver, was the sole income earner. If June and Ward were close to retirement today, their respective social security benefits at full retirement age might be $2,000/month for Ward and $0 for June.  How can they maximize benefits?  At full retirement age (assume 66) Ward files for social security retirement benefits but then immediately suspends.  This allows June to begin receiving a spousal benefit (assuming she is at full retirement age) which is $1,000/month or 50% of Ward’s benefit. Then, when Ward turns age 70, Ward may elect to begin receiving his own benefit ($2,640 in this example) that has increased 8% per year from age 66-70 thanks to “Delayed Retirement Credits”. Assuming average life expectancy, this combination will provide June and Ward the maximum benefit.  What if Ward passes away at age 75? June will receive the higher of her benefit or Ward’s as a survivorship benefit - $2,640 in this example.

Claim Now, Claim More Later

Elyse Keaton: Elyse Keaton of “Family Ties” was played by Meredith Baxter (and mother of Michael J. Fox in the show).  Elyse, unlike June Cleaver, had income of her own as an architect. Elyse and her husband Steven Keaton had similar earnings. If Elyse and Steven were close to retirement today, both of their social security benefits at full retirement age might be $2,000/month. Rather than “filing & suspending” like June and Ward, the Keatons might consider another strategy to maximize their total benefits.  At full retirement age Elyse should consider taking her own benefit or $2,000/month.  Steven, at full retirement age, may choose to restrict his benefit to a spousal benefit only (50% of Elyse’s benefit) or $1,000/month.  This allows Steven to collect some benefits now while allowing his own benefit to grow at 8% until age 70.  At age 70, Steven may elect to begin receiving benefits based on his own earnings – or $2,640/month.  Note that the survivor benefit for each of them now becomes $2,640.  The election to “restrict” to a spousal benefit can only be done at full retirement age or later. 

So, are you more like June or Elyse?  If your situation is more like June’s then consider the “File & Suspend” strategy.  If your circumstances are more like Elyse’s then consider the “Claim Now, Claim More Later” strategy. Do you have a social security question? Let us know – we love to research and help you maximize the benefits. 

Timothy Wyman, CFP®, JD is the Managing Partner and Financial Planner at Center for Financial Planning, Inc. and is a frequent contributor to national media including appearances on Good Morning America Weekend Edition and WDIV Channel 4 News and published articles including Forbes and The Wall Street Journal. A leader in his profession, Tim served on the National Board of Directors for the 28,000 member Financial Planning Association™ (FPA®), trained and mentored hundreds of CFP® practitioners and is a frequent speaker to organizations and businesses on various financial planning topics.

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The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing information is accurate or complete. Any information is not a complete summary or statement of al available data necessary for making a decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of Raymond James. The examples provided are for illustrative purposes only. Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation.  Every individual’s situation is unique and you should consult with the appropriate professional regarding your individual situation. Guarantees are based on the paying ability of the issuer. #C14-000038

Health Savings Account Basics

With the Affordable Care Act becoming effective in 2014, healthcare seems to be top of mind with a lot of people.  But there are still many kinks to be worked out and many questions left unanswered.  In a world of uncertainty, why not consider utilizing a savings vehicle to help with medical costs that you can control? 

Using an HSA

A Health Savings Account, or HSA, is a fairly new type of account that is available to those who are enrolled in a high deductible health care plan.  Many confuse an HSA with a Flex Spending Account or FSA – don’t make that mistake!  A Health Savings Account is typically much more flexible and allows you to roll any unused funds over year to year, something a Flex Spending Account does not offer – it is a “use it or lose it” plan. 

What an HSA Can Cover

Many employers who offer high deductible plans will often contribute a certain amount to the employee’s HSA each year as an added benefit, somewhat like a 401k match.  Dollars contributed to the account are pre-tax and earnings accumulate tax deferred.  Funds withdrawn, if used for qualified medical expenses (including earnings), are tax-free.  The list of qualified medical expenses can be found at irs.gov, however, just to give you an idea, a few include:  expenses to cover your deductible (not premiums), co-payments, prescription drugs, various dental and vision care expenses, etc.  As always, consult with your financial advisor, tax advisor and health savings account institution to verify what expenses are considered qualified.  If you make a withdrawal that is considered “non-qualified”, you will be subject to taxes and a 20% penalty on the withdrawal amount. 

Here are the details for 2014:

Individuals

• Must have a plan with a minimum deductible of $1,250

• $3,300 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $6,350

Family

• Must have a plan with a minimum deductible of $2,500

• $6,550 contribution limit ($1,000 catch-up contribution if 55 or older)

• Maximum out-of-pocket expenses cannot exceed $12,700

Withdrawing from an HSA

Once you reach age 65 and enroll in Medicare, you can no longer contribute to an HSA.  However, once you are 65, funds can be withdrawn for any purpose, medical related or not, and you will no longer be subject to the 20% penalty.  However, the withdrawal will be included in taxable income, like an IRA or 401k distribution. This can present a great planning opportunity for clients who may want to defer additional money but have already maximized their 401k plans or IRAs for the year.  Although you have to wait 5 ½ years longer to access the funds from a HSA than a traditional retirement plan (age 59 ½) to avoid penalty, this is just another investment vehicle that could reduce taxable income in the year contributions were made while earnings have the opportunity to grow tax-deferred and tax free.  

As you can see, a Health Savings Account can be a great addition to an overall financial plan and should be considered if you are covered under a high deductible health plan.  No one likes medical expenses; this can be a vehicle that can potentially soften of medical expenses. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation.  The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.  Any opinions are those of Center for Financial Planning, Inc., and not necessarily those of RJFS or Raymond James.  You should discuss any tax or legal matters with the appropriate professional. #C13-002464