Making the Most of your Empty Nest Years

 In a recent meeting, I asked a client how their year had been and they exclaimed:

“It’s like being in college, only with money!”

The words struck a chord. After raising two children, educating them, and seeing them move away (fully employed) my clients were busy starting their empty nest years.  As they explained, after years of doing the right things financially, they were ready and excited for the next chapter in their lives before retiring.  Fortunately, they are healthy, both physically and financially, and have begun weaving more leisure and travel into their schedules.  Their new lifestyle is a fine reward for years of delayed gratification in some areas and I couldn’t be happier for them. 

Planning for the Empty Nest

Here are some of the keys to living well during the empty nest years:

• Make time to plan – ideally over multiple years
• Spend less than you earn – this may be financial planning 101 but it takes commitment and discipline
• Save for college – it is not always necessary to save 100% of the costs, but going into the college tuition years with substantial savings (i.e. 529 plan) will allow you and your kids to avoid significant debt
• Save for your own retirement – systematically contribute to your 401k, 403b or other tax advantaged plan

My client’s story also gave me reason to pause and reflect, or plan, on what might be “next” for our family.  While I am used to dispensing advice for a living and helping others plan an ideal life, I am fortunate to have so many clients and meetings like the above to inspire me to continuously think about and plan for a life well lived.  While my wife Jen and I (we celebrated our 22^nd wedding anniversary this month) are not quite empty nesters, two of our three children will be full time college students living on their own for most of the year.

Wyman Nest Dwindles

Our oldest Matt will be in his third year at The University of Kansas.  Matt, a soccer player in high school, walked on to the football team and won the starting position last season.  His year was highlighted by kicking a game-winning 52-yard field goal as time expired.  Matt will return to KU in the fall for his second season after interning here at The Center this summer. 

http://www.youtube.com/watch?v=HyYWj5lsFmk

Our middle child, Jack, just graduated from Bloomfield Hills High School, the first ever class at the merged high school.  Jack finished a stellar baseball season as his team won their district and he was named team MVP, All League and All District as a pitcher and third baseman.  Jack is undecided on his college choice but has been accepted to Albion College and Belmont University in Nashville.

http://www.miprepzone.com/oakland/results.asp?ID=13633

Our youngest, Kacy, just finished 5^th grade and continues to be an inspiration as she manages a rare disease called Cystinosis.  A highlight of Kacy’s year was being to be Principal for the Day at Bloomfield Hills Middle School where extra lunch time and recess was the call of the day! Kacy also enjoys swimming year round with a little dance thrown in for variety.

Words of encouragement from our principal....

"Good morning BHMS! Please excuse this interruption. This is your Principal for the Day, Kacy Wyman. I just wanted to wish you a great day - have fun and work hard!"

Jen and I look forward to our empty nest years and living the “college life” like my clients described.  However, for now, we are mostly excited to be traveling to Kansas and other parts of the country for football and baseball as well as being with friends at Wing Lake beach or Kacy’s swim meets. 

From our family to yours, have a great summer and take pause to plan what’s “next” for you and yours :)

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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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-019071

Raymond James Bank Deposit Program simplifies FDIC coverage

If you’re not familiar with the Raymond James Bank Deposit program, a quick read here could save you a big hassle. The program is designed to help you take advantage of up to $2,500,000 of FDIC coverage without putting any extra work on your plate.

What is FDIC?

The FDIC (Federal Deposit Insurance Corporation) covers cash deposit accounts, dollar for dollar, including principal and accrued interest up to a limit in the event of a bank failure.  It is funded by the premiums paid into the corporation by banks on the deposits they hold.  Historically, in the event of a failure, funds are available to depositors within days after the closing of the bank.

How much does FDIC cover?

Until October 2008 coverage was limited to $100,000 per depositor.  During the financial crisis in the fall of 2008 the government stepped in and increased the insurance limit temporarily to $250,000 to prevent bank runs from occurring as the financial crisis and subsequent bank failures accelerated.  Later in 2010 the increase in the limit was made permanent. 

How do you calculate the coverage you have?

For example, let’s say Joe has $250,000 at a bank between his checking, savings, CDs and money market accounts maximizing his coverage there.  If Joe was married to Sally, and these accounts were titled jointly, then they could have a combined coverage of up to $500,000.  The coverage is per bank meaning if Joe and Sally had $500,000 at 10 different banks they would have $5,000,000 in FDIC coverage.  But, for Joe and Sally, or anyone, having money spread out between multiple banks could be very confusing and time consuming to keep track of everything.

Gone are the days of playing games to maximize your FDIC insurance coverage on bank deposits! 

Insuring more than $250,000 per depositor

One account at Raymond James through the Raymond James Bank Deposit Program (RJBDP) can provide up to $2,500,000 ($5,000,000 for joint accounts) of total FDIC coverage.  The work is done behind the scenes by Raymond James as available cash is deposited into interest-bearing deposit accounts at up to 12 banks automatically for our clients.

Another way to qualify for more coverage is by holding deposits in different ownership categories (account types).  Below is a table of the categories and limits.  The RJBDP can then increase these limits according to the above numbers as well.

Source: Raymond James

As with all insurance, you hope you never need to use it.  Cash can play an important role in an overall financial plan and knowing it is protected can lend confidence.  When it comes to FDIC insurance coverage you likely have much more than you realize!

Angela Palacios, CFP®is the Portfolio Manager at Center for Financial Planning, Inc. Angela specializes in Investment and Macro economic research. She is a frequent contributor to Money Centered as well asinvestment updates at The Center.

The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Laws, coverage, and program rules are subject to change. Hypothetical example is for informational purposes only, and does not represent and account or investor experience.

Raymond James & Associates, Inc. and Raymond James Financial Services, Inc. are affiliated with Raymond James Bank, a federally chartered savings bank. Unless otherwise specified, products purchased from or held at Raymond James & Associates or Raymond James Financial Services are not insured by the FDIC, are not deposits or other obligations of Raymond James Bank, are not guaranteed by Raymond James Bank and are subject to investment risks, including possible loss of the principal invested. The FDIC insurance limit per depositor is $250,000. Coverage applies to total holdings per bank per depositor. Visit fdic.gov for more information.

Is 40 the “Magic” Age for Financial Planning?

When is Financial Planning, on your own or with the help of a professional, appropriate? The correct answer is you should probably begin saving the first day that you receive your first paycheck.  However, in my 23 years of experience, folks tend to get “serious” about planning near the age of 40.  I do not by any means want to discourage anyone younger than 40 to put off planning until they hit that “magic” 40 milestone. Just about anyone that has achieved financial success will tell you to start as early as possible.

Some questions and issues that the 40+ crowd might consider: 

• How much should I be saving? I have heard rules of thumb such as 10% or 20% but what does that mean for me and my specific goals?

• I’m busy. What are the options to pay bills other than the standard envelope and stamp method?

• Life insurance: Salespeople have been hounding me for years to buy life insurance. I couldn’t afford it in the past and secretly didn’t see the value, but I’m ready now. What type and amount should I get to protect my family so I am not insurance rich and cash poor?

• College: My kids are getting closer to college age. How do I pay the ever-increasing tuition?

• I am ready to invest my wealth. What are best options for me?  Should I max out my 401k or 403b or is a ROTH a better option?

• Estate planning: I’m all grow’d up now and ready (I think) to consider a Will and perhaps a Living Trust. How do I know which one I need?

• My parents are aging and I am not sure if they have the resources for their care. What should I be doing now to prepare or help them prepare?

• I have heard about the “Boomerang kids” phenomenon. Should I move to a one bedroom condo now?

• Employer retirement plans (401k/403b): Whoa, I have real money now! How should it be invested?

• I give to charities that are making a difference in the world. Is there a way to maximize my donations and perhaps even get a tax break?

• Income taxes: I don’t mind paying … I just don’t want to pay a cent more than my share. How can I limit my income tax exposure?

• If I choose to work with a professional financial planner whom should I contact? I have not have worked with a professional advisor yet so I am a bit leery, and maybe even a bit scared to share my financial picture (not sure how I stack up with others).

If you’ve been asking yourself some of these questions, no matter your age, you are ready to get “serious” about your financial life.  Think about some of the issues and questions that you find yourself facing and feel free to give me an email. If my 23 years of working with similar folks can be of help, I’d love to share my insight because you don’t need to wait for some “magic” age.

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.

C14-019069

Roth vs. Traditional IRA

 If you’re planning to use an IRA to save for retirement, but aren’t sure if Roth or Traditional is best for you, we can help sort it out. First, before we begin breaking down the pros and cons of each type of retirement account, you need to be sure that you are eligible to make contributions to these accounts.

For 2014 Roth IRA contribution rules/limits:

• For single filers the modified adjusted gross income (MAGI) is phased out between $114,000 and $129,000 (unsure what MAGI is? Click here)
• For married filing jointly the MAGI is phased out between $181,000 and $191,000
• Please keep in mind that for making contributions to this type of account it makes no difference if you are covered by a qualified plan at work (such as a 401k or 403b), you simply have to be under the income thresholds.
• Maximum contribution amount is $5,500

For 2014 Traditional IRA contributions:

• For single filers who are covered by a company retirement plan (401k, 403b etc…), in 2014 the deduction is phased out between $60,000 and $70,000 of modified adjusted gross income (MAGI).
• For married filers, if you are covered by a company retirement plan in 2014, the deduction is phased out between $96,000 and $116,000 of MAGI.
• For married filers not covered by a company plan but with a spouse who is, in 2014 the deduction for your IRA contribution is phased out between $181,000 and $191,000 of MAGI.
• Maximum contribution amount is $5,500

If you are eligible, you may be wondering which makes more sense for you?  Well, like many questions in finance the answer is…it depends! 

Roth IRA Advantage

The benefit of a Roth IRA is that the money grows tax deferred and someday, when you are over age 59.5, you can take the money out tax free.  However, in exchange for the ability to take the money out tax free, you don’t get an upfront tax deduction from the IRS.  Essentially you are paying your tax bill today rather than in the future. 

Traditional IRA Advantage

With a Traditional IRA, you get an upfront tax deduction.  For example, if a married couple filing jointly had a MAGI of $180,000, (just below the phaseout threshold), then they would probably be in a 28% marginal tax bracket.   If they made a full $5,500 Traditional IRA contribution they would save $1,540 in taxes.  To make that same $5,500 contribution to a ROTH, they would need to earn $7,040, pay the taxes, and then make the $5,500 contribution.  The drawback of the traditional IRA is that you will be taxed on it someday when you begin making withdrawals in retirement.

Pay Now or Pay Later?

The challenging part about choosing which account is right for you is that nobody has any idea what tax rates will be in the future.  If you choose to pay your tax bill now (Roth IRA), and in retirement you find yourself in a lower tax bracket, then you may have been better off going the Traditional IRA route. However, if you decide to make Traditional IRA contributions for the tax break now, and in retirement you find yourself in a higher tax bracket, then you may have been better off going with a Roth. 

How Do You Decide?

A lot of it depends on your personal situation, such as the career path you’ve chosen and your desired income in retirement. However, we typically recommend that people just starting out in their careers who will probably earn a much higher income in the future make ROTH contributions.  If you’re in the 25-28% marginal bracket, a Traditional IRA may make more sense for the immediate tax break now.  As always, before making any final decisions, it’s always a good idea to work with a qualified financial professional to help you understand what makes the most sense for you.

Matthew Trujillo, CFP®, is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Any opinions are those of the Center for Financial Planning, Inc. and not necessarily those of Raymond James. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. You should discuss any tax matters with the appropriate professional.

Links are being provided for informational purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. C14-015057

Rewriting Retirement: 5 Steps to Your Plan

Life, after work, has been completely redefined. Those leaving the 9 to 5 behind, in favor of a more relaxed, enriched or exciting lifestyle, are rewriting the meaning of retirement.  Part of the credit for retirement’s overhaul can be given to longer and healthier lifestyle trends.  Leaving the workforce does not have to be the endgame, but rather your signature version of a rich life after retirement that could last a long time!

Here are five steps to help you get ready for what comes next:

1. Create a retirement budget and track expenses

2. Shore up cash reserves

3. Know how you will deal with unexpected financial needs

4. Identify income sources that contribute to cash flow

5. Take the time to ensure that you are psychologically ready for the change of pace

On the most basic level, we all have goals and aspirations for our life after work.  Some are big, some small, but most importantly, they are unique to each retiree.   If you are stressed thinking about retirement, talk to your financial planner about the five steps above.  Take the time to double-check that you are ready for what comes next.  Today’s retirement holds the promise of being more fulfilling than ever before – but could be longer and more expensive too. 

Laurie Renchik, CFP®, MBA is a Partner and Senior Financial Planner at Center for Financial Planning, Inc. In addition to working with women who are in the midst of a transition (career change, receiving an inheritance, losing a life partner, divorce or remarriage), Laurie works with clients who are planning for retirement. Laurie was named to the 2013 Five Star Wealth Managers list in Detroit Hour magazine, is a member of the Leadership Oakland Alumni Association and in addition to her frequent contributions to Money Centered, she manages and is a frequent contributor to Center Connections at The Center.

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 opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. C14-017445

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