What’s the Difference Between a Roth and a Traditional IRA?

Contributed by: Kali Hassinger, CFP®, CDFA®

Many are focused on filing their taxes by April 15th, but that day is also the deadline to make a 2019 IRA contribution! With only a week left, how will you decide between making a Roth or a traditional IRA contribution? There are pros and cons to each type of retirement account, but your individual situation will determine the better option. Keep in mind, the IRS has rules to dictate who can make contributions, and when.

2019 Roth IRA Contribution Rules/Limits

• For single filers, the modified adjusted gross income (MAGI) limit is phased out between $122,000 and $137,000.

• For married filing jointly, the MAGI limit is phased out between $193,000 and $203,000

• Please keep in mind that for making contributions to this type of account, it makes no difference if you are covered by a qualified retirement plan at work (401k, 403b, etc.), you simply have to be under the income thresholds.

• The maximum contribution is $6,000 for those under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

2019 Traditional IRA Contributions

• For single filers covered by a company retirement plan, the deduction is phased out between $64,000 and $74,000 of MAGI.

• For married filers covered by a company retirement plan, the deduction is phased out between $103,000 and $123,000 of MAGI.

• For married filers not covered by a company plan, but have a spouse who is, the deduction for your IRA contribution is phased out between $193,000 and $203,000 of MAGI.

• The maximum contribution is $6,000 if you’re under the age of 50. For those who are 50 & older (and have earned income for the year), you can contribute an additional $1,000 each year.

Now, you may be wondering what type makes more sense for you (if you are eligible). Well, like many financial questions…it depends! 

Roth IRA Advantage

The benefit of a Roth IRA is that money grows tax deferred. So, when you are over age 59 1/2 and have held the money for 5 years, the money you take out is tax free. However, in exchange for tax free money, you don’t get an upfront tax deduction when investing the money in the Roth. You are paying your tax bill today rather than in the future. 

Traditional IRA Advantage

With a traditional IRA, you get a tax deduction the year you contribute money to the IRA. For example, a married couple filing jointly has a MAGI of $190,000 putting them in a 24% marginal tax bracket.  If they made a full $6,000 traditional IRA contribution they would save $1,440 in taxes. To make that same $6,000 contribution to a Roth, they would need to earn $7,895 to pay 24% in taxes in order to then make the $6,000 contribution. The drawback of the traditional IRA is that you will be taxed on it later in life when you begin making withdrawals in retirement. Withdrawals taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Pay Now or Pay Later?

Future tax rates make it challenging to choose what account type is right for you. If you go the Roth IRA route, you will pay your tax bill now. The downside is that you could find yourself in a lower tax bracket in retirement. In that case, it would have been more lucrative to take the other route. And vice versa.

How Do I Decide?

We typically recommend Roth contributions to young professionals because their income will most likely increase over the years. However, if you need tax savings now, a traditional contribution may make more sense. A traditional IRA may be the best choice if your income is stable and you’re in a higher tax bracket.  However, you could be disqualified from making contributions based on access to other retirement plans. 

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.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

COVID‐19 and Your Money: New Risks and Simple Solutions

Contributed by: Center for Financial Planning, Inc.®

Should pre‐retirees (and their advisors) take a new look at retirement income? It’s no secret that COVID‐19 has greatly impacted the world, but let’s talk specifically about its impact on retirement planning. Partner and Senior Financial Planner Nick Defenthaler, CFP®, RICP® provides valuable insight in this Q+A.

Q. Does the COVID‐19 crisis (market decline and job loss) mean retirement is more in peril than ever before? Some advisors tell clients to "work longer" to achieve their desired retirement outcome, but has that advice quickly become outdated due to job cuts?

A. Unfortunately, many retirement plans will be pushed out by the pandemic. Even in a diversified 60% stock and 40% bond portfolio, many clients were down just north of 20% around mid‐April. Thankfully, the market has recovered quite a bit since its lows in March. However, for those closely approaching retirement, this highlights the danger of the “sequence of returns risk”…aka having crummy market returns in the year or so leading up to retirement or shortly after transitioning into retirement. Working longer is still good advice, in my opinion, but what most advisors don’t communicate is that working longer doesn’t have to mean working full‐time longer. Over the past 5 years, I’ve seen an uptick with clients “phasing into retirement”, which essentially means working on a part‐time basis before stopping work completely. Most clients largely underestimate how big of a positive impact on working and earning even $15,000/yr for several years can have on the long term sustainability of their portfolio.

Q. Does the 4% withdrawal rule make sense?

A. Yes, I believe it does. Keep in mind, it’s still a very conservative distribution rate for those with a 30‐35 year retirement time horizon, especially if the client is comfortable dipping into principal. Right now, I think the biggest risk of the 4% rule is our low interest rate environment and the “sequence of returns risk” mentioned previously. However, they both can be greatly mitigated through prudent planning and investment choices in the “retirement risk zone” which I would define as 3 years leading up to retirement and 3 years post‐retirement.

Q. Should pre‐retirees be looking at guaranteed sources of income, such as annuities?

A. Annuities should be evaluated for almost all retirees. The keyword here is evaluated and not implemented. Annuities have a bad reputation by some very prominent faces you see in the media and rightfully so for a myriad of reasons. But the reality is simple, guaranteed income is proven to make human beings feel happier and more secure, especially in retirement and there are only a few ways to get it. Through the government (Social Security), pensions (which are becoming extinct), and annuities. When using annuities for clients I work with, it’s only for a portion of their overall spending goals, perhaps 10‐20% of their cash flow needs. That will not be the right fit for everyone, but it should be part of the due diligence process when evaluating the proper retirement income strategy for a client. In times like this, you won’t find too many clients who are upset that they transferred risk from their portfolio to an insurance company in the form of an annuity that offers guaranteed income.*

Q. Do you have an interesting story about a client who changed their strategy?

A. I work with a couple who recently faced a hard stop working full‐time for several reasons, one being health‐related. Their retirement income goals are a bit of a stretch considering their accumulated portfolio. Our plan was for husband and wife (both 62) to work part‐time starting this year to be eligible for health insurance and receive some income until at least 65. This would dramatically shrink their portfolio distribution rate in the early years of retirement where the “sequence of return risk” is very real. Unfortunately, both of their jobs were affected by the pandemic and the possibility of working part‐time for several years is now slim to none. The clients own their home free and clear and have no plans whatsoever to move in the future. This ultimately led them to explore a home equity conversion mortgage (HECM) which is a type of reverse mortgage insured by the Federal Housing Administration. Over the past decade, there have been dramatic improvements in how these loans are structured to protect borrowers and surviving spouses. It can be a phenomenal financial planning and retirement income tool as researched by well‐respected thought leaders in our profession such as Wade Pfau and Michael Kitces. The HECM is allowing the clients to fully retire right now and enjoy time with their grandkids. They can now step away from jobs that have been extremely stressful for them over the years. Helping them find such a solution to still achieve their goal in this environment has been extremely rewarding!

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® Nick specializes in tax-efficient retirement income and distribution planning for clients and serves as a trusted source for local and national media publications, including WXYZ, PBS, CNBC, MSN Money, Financial Planning Magazine and OnWallStreet.com.

*Guarantees are based on the claims paying ability of the insurance company. Every investor's situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. This material is provided for information purposes only and is not a complete description of the securities, markets, or developments referred to in this material. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. This information is not intended as a solicitation or recommendation to buy or sell any security referred to herein. Raymond James Financial Services, Inc. does not provide advice on mortgages.

If I Don’t Have To Take A Withdrawal From My IRA This Year, Can I Still Give To Charity?

Contributed by: Jeanette LoPiccolo, CRPC®

With the recent passage of the CARES Act, IRA owners (over the age of 70 ½) are not required to make a minimum distribution in 2020. While some folks may wish to continue their IRA withdrawals for cash flow or tax planning reasons, others may wish to skip IRA withdrawals.

The good news: If you are over age 70 ½ and want to make donations to charity, Qualified Charitable Distributions (QCD) continue to be a great strategy for 2020. Simply contact your Client Service Associate to get the process started.

QCD Refresher

The QCD, which applies only if you’re at least 70 ½ years old, allows you to directly donate up to $100,000 per year to a charity. Normally, any distribution from an IRA is considered ordinary income from a tax perspective; however, when the dollars go directly to a charity or 501(c)3 organization, the distribution from the IRA is considered not taxable.

If you are not sure how much you can afford to give to charity this year, simply ask your financial planner to review your plan and make a recommendation.

Jeanette LoPiccolo, CFP® is an Associate Financial Planner at Center for Financial Planning, Inc.® She is a 2018 Raymond James Outstanding Branch Professional, one of three recognized nationwide.

RMDs Waived In 2020! Should I Make A Withdrawal Anyway?

Contributed by: Kali Hassinger, CFP®

If you read through our CARES Act blog you may have noticed a brief mention of the fact that Required Minimum Distributions are suspended for 2020. This change applies to all retirement accounts subject to RMDs such as IRAs, employer-sponsored plans like 401(k)s, and 403(b)s, and inherited retirement accounts.

If you are among the fortunate who only take RMD withdrawals because they are required, the CARES Act presents a real financial planning opportunity for 2020! The reduction in your income provides some wiggle room to implement other tax, income, and generational strategies.

ROTH CONVERSION

Moving money from a tax-deferred account to a tax-exempt account like a Roth IRA is a great long-term strategy to consider. Typically, RMDs must be withdrawn from the retirement account before any additional funds are allowed to be converted.

Account holders could now, in theory, convert their typical RMD amount into a Roth. Your taxable income wouldn’t be any higher than you’ve most likely planned for this year and you get the benefit of the Roth tax treatment in the future. Roth conversions are especially favorable with accounts that will ultimately be inherited by children/family members who are in higher tax brackets or if your IRA balance is significant. The SECURE Act of 2019 changed the rules for inherited retirement accounts, they are no longer able to be stretched out over the lifetime of the beneficiary. Now, a beneficiary must withdrawal the entire account balance within ten years of inheritance. Distributing a tax-deferred retirement account in ten years, which has often taken a lifetime to accumulate, could create substantial taxable income for the beneficiary.

Roth funds, however, maintain their tax-free withdrawal treatment from generation to generation!

Keep in mind that, unless certain criteria are met, Roth IRA owners must be 59½ 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.

TURN ON OTHER INCOME

For many in retirement, managing income to remain consistent is an integral part of their financial plan. In years when income fluctuates up, taxes due and Medicare premiums can be negatively impacted. The suspension of RMDs provides the opportunity to act on some of the strategies that you may be avoiding because of the tax implications. Non-Qualified Annuity withdrawals, for example, are taxed on a last-in, first-out basis. That means that growth is assumed to come out first and is taxable as ordinary income (note: the taxation of annuitized accounts differs). If you’ve been holding off on accessing a Non-Qualified Annuity to avoid the additional tax, this year could be an excellent opportunity to make a withdrawal instead of taking your RMD!

HARVEST GAINS

We’ve seen our fair share of market losses so far this year, and harvesting investment losses is an effective tax reduction strategy. However, for those who aren’t taking RMDs this year, it could be an opportunity to harvest gains instead. It isn’t uncommon to hold onto long-term investments, not necessarily because they are still desirable, but to avoid the capital gain taxation. 

If annual income is reduced by your RMD amount, there may be some wiggle room to lock-in those profits in a tax-efficient manner.

FILL UP YOUR TAX BRACKET

The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been, historically withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term.  

The Tax Cuts and Jobs Act of 2017 reduced income tax rates for many. If you are in a lower tax bracket now than you have been historically, withdrawing your Required Minimum Distribution amount (or more) may still be beneficial in the long term. For those who have already taken their RMD for the year and wish they hadn’t, there are some options to reverse the withdrawal. The most straight forward choice, if the withdrawal occurred within the last 60 days, is to treat it as a 60 days rollover & redeposit the funds. It’s important to remember that you are only allowed one 60 day rollover per year. If you’re outside of that 60-day window, however, there is a CARES Act provision that allows COVID-19 related hardship withdrawals to be repaid within the next three years. This provision is expected to be broadly interpreted, but we do not have clarity on whether this hardship provision will apply to RMDs.

Be sure to discuss the options surrounding RMDs with both your financial planner and taxpreparer. Any income and tax changes should be examined before making a decision. Many times, reviewing your financial plan and goals can be a helpful exercise in determining what strategy is best for you!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Retirement Planning Challenges for Women: How to Face Them and Take Action

Contributed by: Sandra Adams, CFP®

If we are being completely honest, planning and saving for retirement seems to be more and more challenging these days – for everyone.  No longer are the days of guaranteed pensions, so it’s on us to save for our own retirement.  Even though we try our best to save…life happens and we accumulate more expenses along the way.  Our kids grow up (and maybe not out!).  Our older adult parents may need our help (both time and money).  Depending on our age, grandchildren might creep into the picture.  Add it all up and the question is: how are we are supposed to retire?  We need enough to potentially last 25 to 30 years (depending on our life expectancy). Ughhh!

While these issues certainly impact both men and women, the impact on women can be tenfold.  Let’s take a look at some of the major issues women face when it comes to retirement planning.

1. Women have fewer years of earned income than men

Women tend to be the caregivers for children and other family members.  This ultimately means that women have longer employment gaps as they take time off work to care for their family.  The result: less earned income, retirement savings, and Social Security earnings. It can also halt career trajectory. 

Action Steps

• Attempt to save at a higher rate during the years you ARE working. It allows you to keep pace with your male counterparts. Take a look at the chart below for an estimated percentage of what working women should save during each period of their life.

• If you are married you may want to save in a ROTH IRA or IRA (with spousal contributions) each year, even if you are not in the workforce.

• If you are serving as the caregiver for a family member, consider having a Paid Caregiver Contract drawn up to receive legitimate and reportable payment for your services. This could potentially help you and help your family member work towards receiving government benefits in the future, if and when needed.

2. Women earn less than men

For every $1 a man makes, a woman in a similar position earns 82¢ according to the Bureau of Labor Statistics.  As a result, women see less in retirement savings and Social Security benefits based on earning less.

Action Steps

• Again, save more during the years you are working.  Attempt to maximize contributions to employer plans. Also, make annual contributions to ROTH IRA/IRAs and after-tax investment accounts.

• Invest in an appropriate allocation for your long term investment portfolio, keeping in mind your potential life expectancy.

• Be an advocate for yourself and your women cohorts when it comes to requesting equal pay for equal work.

3. Women are less aggressive investors than men

In general, women tend to be more conservative investors than men.  Analyses of 401(k) and IRA accounts of men and women of every age range show distinctly more conservative allocations for women.  Especially for women, who may have longer life expectancies, it’s imperative to incorporate appropriate asset allocations with the ability for assets to outpace inflation and grow over the long term.

Action Steps

• Work with an advisor to determine the most appropriate long term asset allocation for your overall portfolio, keeping in mind your potential longevity, potential retirement income needs, and risk tolerance.

• Become knowledgeable and educated on investment and financial planning topics so that you can be in control of your future financial decisions, with the help of a good financial advisor.

4. Women tend to live longer than men

Women have fewer years to save and more years to save for.  The average life expectancy is 81 for women and 76 for men according to the Centers for Disease Control and Prevention.  Since women live longer, they must factor in the health care costs that come along with those years. 

Action Steps

• Plan to save as much as possible.

• Invest appropriately for a long life expectancy.

• Work with an advisor to make smart financial decisions related to potential income sources (coordinate spousal benefits, Social Security, pensions, etc.)

• Make sure you have a strong and updated estate plan.

• Take care of your health to lessen the cost of future healthcare.

• Plan early for Long Term Care (look into Long Term Care insurance, if it makes sense for you and if health allows).

5. Women who are divorced often face specific challenges and are less likely to marry after “gray divorce” (divorce after 50)

From a financial perspective, divorce tends to negatively impact women far more than it does men.  The average woman’s standard of living drops 27% after divorce while the man’s increases 10% according to the American Sociological Review. That’s due to various reasons such as earnings inequalities, care of children, uneven division of assets, etc.

The rate of divorce for the 50+ population has nearly doubled since the 1990s according to the Pew Research Center. The study also indicates that a large percentage of women who experienced a gray divorce do not remarry; these women remain in a lower income lifestyle and less likely to have support from a partner as they age.

Action Steps

• Work with a sound advisor during the divorce process, one who specializes in the financial side of divorce such as a Certified Divorce Financial Analyst (CDFA) (Note:  attorneys often do not understand the financial implications of the divorce settlement).

6. Women are more likely to be subject to elder abuse

Women live longer and are often unmarried or alone.  They may not be as sophisticated with financial issues.  They may be lonely and vulnerable. 

Action Items

• If you are an older adult, put safeguards in place to protect yourself from Financial Fraud and abuse. For example: check your credit report annually and utilize credit monitoring services like EverSafe.

• Have your estate planning documents updated, particularly your Durable Powers of Attorney documents, so that those that you trust are in charge of your affairs if you become unable to handle them yourself.

• If you are in a position of assisting an older adult friend or relative, check in on them often. Watch for changes in their situations or behavior and do background checks on anyone providing services.

While it is unlikely that the retirement challenges facing women will disappear anytime soon, taking action can certainly help to minimize the impact they can have on women’s overall retirement planning goals. I have no doubt that with a little extra planning, and a little help from a quality financial advisor/professional partner, women will be able to successfully meet their retirement goals. 

If you or someone you know are in need of professional guidance, please give us a call.  We are always happy to help.

Sandra Adams, CFP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® and holds a CeFT™ designation. She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

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Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation. Raymond James is not affiliated with EverSafe.

The cost and availability of Long Term Care insurance depend on factors such as age, health, and the type and amount of insurance purchased. These policies have exclusions and/or limitations. As with most financial decisions, there are expenses associated with the purchase of Long Term Care insurance. Guarantees are based on the claims paying ability of the insurance company.

The Trillion-Dollar Stimulus On The Way – What You Need To Know About The CARES Act

Contributed by: Kali Hassinger, CFP®

 

As more states implement quarantine tactics, lawmakers in Washington struck a compromise on a major fiscal stimulus package to help combat the effects of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 packs in a lot, with upwards of $2 trillion slated to provide critical support for the economy. In comparison, the American Recovery and Reinvestment Act of 2009 was $831 billion.

While we don't know the short or long term effects of this pandemic on the economy, the combination of monetary and fiscal stimulus efforts will hopefully serve as a bridge until regular economic activity can continue. Even with the largest spike in single-week unemployment claims ever, the optimism surrounding this stimulus helped the S&P 500 post its largest three-day rally (+17.6%) since April 1933.

Lawmakers put together this bipartisan package much more quickly than initially anticipated with crucial provisions to expand unemployment eligibility and benefits, small business relief, and even direct financial support to some US citizens. Here's what we know so far:

Checks Are Coming

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government now!

Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

• Married Filing Jointly: $150,000

• Head of Household: $112,500

• All other Filers: $75,000

The rebates are dispersed based on your 2018 or 2019 income (whichever is the most recent return the government has on file) but are actually for 2020.  This means that if your income in 2018 or 2019 phases you out of eligibility, but your 2020 income is lower and puts you below the phase-out (for example, lose your job in 2020, which many are experiencing), you won't receive the rebate payment until filing your 2020 taxes in 2021!  The good news is that those who do receive a rebate payment based on 2018 or 2019 income and, when filing 2020 taxes, find that their income exceeds the AGI thresholds, taxpayers won't be required to repay the benefit.

How much can I expect to receive?

• Married Filing Jointly: $2,400

• All other Filers: $1,200

• An additional credit of up to $500 for each child under the age of 17

If income is above the AGI limits shown above, the credit received will be reduced by $5 for each $100 of additional income.

When will I receive my benefit? The Timeline isn't clear at this point.  The CARES Act mandates that these payments be processed as soon as possible, but that term doesn't provide a firm deadline. 

Where will my money be sent?  The CARES Act authorizes payments to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have their payment sent to the last known address on file.

Retirement Account Changes

• Required Minimum Distributions are waived in 2020

• Distributions due to COVID-19 Financial Hardship – Distributions up to $100,000 from IRAs and employer-sponsored retirement plans that are due to COVID-19 related financial hardships will receive special tax treatment. There will be no 10% penalty for individuals under the age of 59 ½ and the usual mandatory 20% Federal tax withholding will be waived.  Income, and therefore the taxes due from these distributions, can be spread over three tax years (2020, 2021, and 2022), and there is even the option to roll (or repay) distributions back into the retirement account(s) over the next three years.

• Loans from Employer-sponsored Retirement Plans – The maximum Loan amount was increased from $50,000 to $100,000 and allows account holders to borrow from 100% of their vested balance.  Repayment of these loans can be delayed one year.

Charitable Giving Tax Benefits 

• The CARES Act reinstates a possible above-the-line tax deduction for charitable donations up to $300.  This deduction is only available for taxpayers who do not itemize.

• For those who do itemize, the charitable deduction limit on cash gifted to charities is increased from 60% of Adjusted Gross Income to 100% of Adjusted Gross Income for 2020.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

Student Loan Repayments

• Student loan payments are deferred, and loans will not accrue interest until the end of September.  Although the interest freeze will occur automatically, borrowers will have to contact their loan servicers and elect to stop payments during this period.

Expanded Unemployment Benefits

• Unlimited funding for Temporary Federal Pandemic Unemployment Compensation to provide workers laid off due to COVID-19 an additional $600 a week, on top of state benefits, for up to four months. This includes relief for self-employed individuals, furloughed employees, and gig workers who have lost contracts during the pandemic.

Small Businesses Support

• In the form of more than $350 billion, the CARES Act offers forgivable loans to help keep the business afloat, a paycheck protection plan, grants, and the ability to defer payment of payroll tax, to name a few.

Individual Healthcare

• HSAs and FSAs will now enable the purchase of over the counter medications as qualified medical expenses.  Medicare Part D participants must be allowed to request a 90 day supply of prescription medication, and if/when a COVID-19 vaccine becomes available, it must be free to those on Medicare.

Additional Healthcare Support

• $150 billion is allocated to hospitals and community health centers to provide treatment and equipment to fight coronavirus.

Education Funding

• $30 billion will be allocated to bolster state education and school funding.

State And Local Government Funding

• $150+ billion will be allocated to "state stabilization funds" to support reduced state and local tax receipts.

Other Provisions

• The CARES Act provides an additional $500 billion buffer for impacted and distressed industries, including the airlines, mass transit, and the postal service.

Depending on the length and impact this pandemic, lawmakers are already talking about another round of intervention in a phased approach.

Life may feel a little chaotic these days, but we hope you take comfort in knowing your financial plan was tailored to your risk tolerance, ability to handle market volatility, and overall financial goals. As always, we are here to answer your questions.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Beware of Social Security Phone Scams

Contributed by: Nick Defenthaler, CFP®

Identity theft scams threaten millions of Americans. Reports of phony phone calls continue to flood into the Social Security Administration (SSA) and its Office of the Inspector General (OIG). Scammers claim to be Social Security employees and mislead victims into giving out personal information or making cash/gift card payments. But don’t worry, with our tips you can stay sharp and protect yourself.

Social Security employees WILL occasionally contact people. The SSA contacts those who have ongoing business with the agency, by telephone. However, they will NEVER threaten you. They will NEVER promise a Social Security benefit approval or increase in exchange for information or money. In those cases, the call is 100% fraudulent and your only option is to hang up.

You will receive a legitimate call from the SSA if you recently applied for a benefit, require a record update, or, of course, had requested a phone call from the agency. Otherwise, it’s abnormal to receive a call from the agency.

Social Security employees will NOT:

• Suspend, revoke, or freeze your Social Security number

• Demand an immediate payment

• Ask you for credit or debit card numbers over the phone

• Require a specific means of debt repayment, like a prepaid debit card, a retail gift card, or cash

• Demand that you pay a Social Security debt without the ability to appeal the amount you owe

If there is a problem with your Social Security number or record, the SSA will, in most cases, mail a letter. If you need to submit payments to Social Security, the agency will send a letter with instructions and payment options. NEVER provide information or payment over the phone or Internet unless you are certain of who is receiving it.

There is also an email scam to lookout for. Victims have received emails that appear to be from the SSA or the OIG with attached letters and reports. These documents may seem real at first glance and may include official letterhead and government jargon. But look closer for spelling and grammar mistakes.

Unfortunately in today’s world, you need to have your guard up. Feel free to contact us at any time if you’re weary of a potential scam related to your financial plan – we are here to help any way we can.

If you’re interested in learning more, the SSA addresses the telephone impersonation scheme here.

Nick Defenthaler, CFP®, RICP®, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

The SECURE Act Changes the “Stretch IRA” Strategy for Beneficiaries

Contributed by: Robert Ingram, CFP®

It’s hard to believe that we’re nearly two months into the New Year. As people have had some time to digest the SECURE Act, which was signed into law in late December, our Center team has found that many clients are still trying to understand how these new rules could impact their financial plans. While several provisions of the Act are intended to increase retirement savers’ options, another key provision changes the rules for how non-spouse beneficiaries must take distributions from inherited IRAs and retirement plans.

Prior to the SECURE Act taking effect January 1st of this year, non-spouse beneficiaries inheriting IRA accounts and retirement plans such as 401ks and 403(b)s would have to begin taking at least a minimum distribution from the account each year. Beneficiaries had the option of spreading out (or “stretching”) their distributions over their own lifetimes.

Doing so allowed the advantages of tax deferral to continue for the beneficiaries by limiting the amount of distributions they would have to take from the account each year. The remaining balance in the account could continue to grow tax-deferred. Minimizing those distributions would also limit the additional taxable income the beneficiaries would have to claim.

What has changed under the ‘SECURE Act’?

For IRA accounts and retirement plans that are inherited from the original owner on or after January 1, 2020:

Non-spouse beneficiaries who are more than 10 years younger must withdraw all of the funds in the inherited account within 10 years following the death of the original account owner.

This eliminates the non-spouse beneficiary’s option to spread out (or stretch) the distributions based on his or her life expectancy. In fact, there would be no annual required distributions during these 10 years. The beneficiary can withdraw any amount in any given year, as long as he or she withdraws the entire balance by the 10th year.

As a result, many beneficiaries will have to take much larger distributions on average in order to distribute their accounts within this 10-year period rather than over their lifetime. This diminishes the advantages of continued tax deferral on these inherited assets and may force beneficiaries to claim much higher taxable incomes in the years they take their distributions.

Some beneficiaries are exempt from this 10-year rule

The new law exempts the following types of beneficiaries from this 10-year distribution rule (Eligible Designated Beneficiaries). These beneficiaries can still “stretch” their IRA distributions over their lifetime as under the old tax law.

• Surviving spouse of the account owner

• Minor children, up to the age of majority (however, not grandchildren)

• Disabled individuals

• Chronically ill individuals

• Beneficiaries not more than 10 years younger than the original account owner

What if I already have an inherited IRA?

If you have an inherited IRA or inherited retirement plan account from an owner that died before January 1st, 2020, don’t worry. You are grandfathered. You can continue using the stretch IRA, taking your annual distributions based on the IRS life expectancy tables.

Your beneficiaries of the inherited IRA, however, would be subject to the new 10-year distribution rule.

What Are My Planning Opportunities?

While it still may be too soon to know all of the implications of this rule change, there are number of questions and possible strategies to consider when reviewing your financial plan. A few examples may include:

• Some account owners intending to leave retirement account assets to their children or other beneficiaries may consider whether they should take larger distributions during their lifetimes before leaving the account to heirs.

• Roth IRA Conversions could be a viable strategy for some clients to shift assets from their pre-tax IRA accounts during their lifetimes, especially if they or their beneficiaries expect higher incomes in future years.

• For individuals age 70 ½ or older, making charitable gifts and donations directly from your IRA through Qualified Charitable Distributions (QCD) could be even more compelling now.

• Clients with IRA Trusts as part of their estate plan should review their documents and their overall estate plan to determine if any updates are appropriate in light of the this new 10-year rule.

It’s important to remember that your individual situation is unique and that specific strategies may not be appropriate for everyone. If you have questions about the SECURE Act or you’re not sure what these changes mean for your own plan, please don’t hesitate to contact us!

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

The SECURE Act: How it May Impact Your Retirement

Contributed by: Nick Defenthaler, CFP®

The Senate recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It’s a significant change in legislation for most Americans in or preparing for retirement.  

The SECURE Act is the second notable financial planning-related law change in only three years! The first was in 2017 when the Tax Cuts and Jobs Act (TCJA) significantly changed our tax code. Fast forward to 2019, the SECURE Act became law on December 20th, adjusting rules related to retirement accounts. To see just one meaningful adjustment to our tax code or retirement plan rules every 10-15 years is typical; so to see a major tax code overhaul and the implementation of the SECURE Act, all in a matter of only three years, is unprecedented. 

Needless to say, these changes have certainly kept your Center team on its toes! The SECURE Act contains almost three dozen sections, but for most of you, there are only a few adjustments that could impact your financial plan. Let’s dive in!   

Inherited Retirement Accounts & the End of ‘Stretch’ Distributions   

The new legislation changes how non-spouse account beneficiaries must distribute assets from inherited retirement accounts (IRAs) by removing the so-called ‘stretch’ provision. Most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.

Tell me more…

When a non-spouse beneficiary inherited a retirement account such as an IRA, an annual Required Minimum Distribution (RMD) was required. Typically we think of RMDs occurring in our 70s and beyond but they are also present in many cases for beneficiaries of retirement accounts. If the RMD is not met by year-end, there is a stiff, 50% penalty on any funds that were not distributed that were supposed to be. When a spouse inherits a retirement account, however, there were (and still are) favorable rules in place, that in many cases, do not force the widowed spouse to take annual RMDs. 

Beneficiaries of retirement accounts were allowed to 'stretch' distributions over their lifetime which meant that the IRS only required a small portion of the account to be distributed from the retirement account each and every year.  For those who did not necessarily “need” the inherited dollars to live off of, this was a highly beneficial attribute of an inherited retirement account. Remember, when distributions are made from Traditional, pre-tax retirement accounts, the funds are considered taxable income to the owner and can impact one’s tax bracket for the year. However, if the beneficiary was only taking out the minimum distribution required by the IRS, the beneficiary typically did not have to worry about being pushed into a much higher marginal tax bracket. 

For example:

A 100 year old could name her 2 year old great-great grandchild as the beneficiary on her IRA. When the 100 year old client died, the great-great grandchild could stretch RMDs over their lifetime – which would result in a very small taxable event for the child each year given their age. To put it mildly, the IRS was not a fan of this because it essentially allowed families to turn retirement accounts into a very powerful, multigenerational wealth preservation tool that generated very little tax revenue over an extended period of time. 

How do the new rules work?

Moving forward, the ‘stretch’ provision has been eliminated for non-spouse account beneficiaries. For those beneficiaries who inherit a retirement account from an account holder who passes away in 2020 and beyond, the new standard under the SECURE Act will be the ’10-Year Rule’.   

Under this 10-Year Rule, the entire IRA must be emptied by the end of the 10th year following the death of the original account owner. Unlike like previous law under the ‘stretch’ provision, there is no annual RMD, the beneficiary has full control over how much they distribute from the account. As you might suspect, this will now require a high level of strategic tax planning as a retirement account beneficiary.

Questions to ask:

Does it make sense to take distributions evenly over that 10-year time frame if income is projected to be the same for the foreseeable future? Is the beneficiary’s income dramatically lower in a particular year? If so, could it make sense to take a sizeable distribution from the IRA so the taxable income from the account is taxed at a lower rate than most other years? In my humble opinion, this makes working with a comprehensive financial planner even more critical for IRA beneficiaries given all of the moving parts clients will now have to navigate from a tax standpoint. 

Roth IRA/401k/403b Accounts

We haven’t talked much about it yet but Roth IRA/401k/403b accounts are also subject to the 10-year rule, however, distributions to beneficiaries are NOT taxable. For those inheriting Roth accounts, waiting until the last minute and liquidating the account in year 10 could actually be a very smart move to take full advantage of the tax-free growth aspect of a Roth account. 

What if I already have an inherited IRA that I’m taking lifetime, stretch distributions from?  

If you inherited a retirement account from someone who passed away in 2019 or before, you are grandfathered into using the ‘stretch’ provision. The new, 10-year rule will NOT apply to you. 

Who is exempt from the new 10 year distribution rule?

• Spousal beneficiaries

• Individuals who are not more than 10 years younger than the decedent

• Disabled or chronically ill beneficiaries

• Certain minor children (of the original account owners) but only until the child attains age 18 or 21, depending on the state of residence

• 501(c)(3) charitable organizations

Possible planning strategies to consider given the new 10-year distribution rule:

• Roth conversions during the original account owners life to reduce taxable IRA assets.

• Using pre-tax retirement accounts for spending needs to reduce taxable IRA assets in the original account owner’s estate.

• If charitably inclined, the original account owner should consider utilizing the Qualified Charitable Distribution (QCD) from their IRA or name their favorite charity as the beneficiary on the pre-tax retirement account (remember, charities do NOT pay any tax when they inherit these funds).

• If you have multiple beneficiaries, be strategic with who you name as the beneficiary of the various accounts you own (ex. Consider leaving pre-tax assets to a son who is in a low tax bracket but leave your Roth IRA to your daughter who is in a high bracket).   

Required Minimum Distributions Age Increase

Another major headline from the SECURE Act is moving the age one must begin taking Required Minimum Distributions (RMDs) from age 70 ½ to age 72.

This gives account owners an extra 18 months of tax-deferred growth if they don’t immediately need to tap into their retirement accounts.

Keep in mind, this new rule only applies to those who turn 70 ½ in 2020 or later. If you have already attained age 70 ½ and started taking RMDs, you are still required to do so under previous rules.

Although the age for RMDs is being pushed out a bit, the age at which IRA account owners can utilize the Qualified Charitable Distribution (QCD) strategy remains unchanged at age 70 ½. Given recent tax reform and its impact on charitable planning, we were happy to hear this news.   

Eliminates the age limit for making Traditional IRA contributions

The SECURE Act also lifts the age restriction on who can contribute to a Traditional IRA. Previously, once an individual reached age 70 ½, they were no longer able to contribute directly. This rule always puzzled me, because with Roth IRAs, anyone, regardless of age, could contribute to the account as along as he or she had earned income from working and was eligible to do so based on certain income limits. 

While we don’t foresee this affecting a large number of Center clients, it’s on our radar, especially as this rule relates to "back-door" Roth IRA conversions.   

In summary… 

As with any law change affecting personal financial planning, there are still areas we are staying on top of with continued IRS guidance (ex. A 10-year rule on retirement accounts that name a trust as a beneficiary).  We are committed to keeping you informed and up to speed on these changes.   

Our financial planning team looks forward to having individual conversations with you soon to explain how the SECURE Act will impact your own personal financial situation.  At our 2020 Economic & Investment Update Event in February, we will spend roughly 15 minutes on the SECURE Act and provide even further commentary beyond the detailed summary above. Be sure to sign up if you haven’t already. 

As always, please feel free to reach out to your advisor if you have specific questions. On behalf of the entire Center team, we wish you a very Happy New Year and look forward to helping guide you and your family through the ever changing financial landscape!   

Nick Defenthaler, CFP®, RICP®

Partner and CERTIFIED FINANCIAL PLANNER™ 

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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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. 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. 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. Unless certain criteria are met, Roth IRA owners must be 59½ 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.

New Year Financial To-Dos!

Contributed by: Kali Hassinger, CFP®

There's no better time than a fresh decade to begin making plans and adjustments for your future. Although we may think of the New Year as a time for "resolutions," it's important to focus on actionable and attainable goals, too. Instead of setting a lofty resolution without a game plan in mind, might I suggest that you consider our New Year Financial checklist below? If you get through this list, not only will you avoid the disappointment of another forgotten resolution in February, you'll feel the satisfaction of actually accomplishing something really important!

• Review your net worth as compared to one year ago, or calculate your net worth for the first time! Regardless of how markets perform, it's important to evaluate your net worth annually.  Did your savings increase or should you set a new goal for this year? If you find that you’re down from last year, was spending a factor?  There’s no better way to evaluate than by taking a look at the numbers!

• Speaking of spending and numbers, review your cash flow!  How much came in last year and how much went out?  Ideally, we want more coming in than is going out!

• Now, let's focus on the dreaded budget, but instead we’ll call it a spending plan.  Do you have any significant expenses coming up this year?  Be prepared by saving enough for unexpected costs. 

• Be sure to review and update beneficiaries on IRAs, 401(k)s, 403(b)s, life insurance, etc.  You'd be surprised at how many people don't have beneficiaries listed on retirement accounts. Some even forgot to remove their ex-spouse!

• Revisit your portfolio's asset allocation. Make sure your portfolio investments and risks are still aligned with your life, goals, and comfort level. I'm not at all suggesting that you make changes based on market headlines, but you want to be sure that the retirement or investment account you opened 20 years ago is still working for you.

• Review your Social Security Statement. If you're not yet retired, you will need to go online to review your estimated benefit. Social Security is one of the most critical pieces of your retirement, so be sure your income record is accurate.

Of course, this list isn't exhaustive. Reviewing your financial wellbeing is an in-depth process, which is why the final step is to set up a review with your advisor. Even if you don't work with a financial planner, at a minimum set aside time on your own, with your spouse, or a trusted friend to plan on improving your financial health (even if you only get to the gym the first few weeks of January).

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.