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

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

Sharing Your Tax Documents with Your Financial Planner

Dear Diary,

In 2013, I worked hard and got that raise I was hoping for. But when it came to filing taxes …

I like to refer to a tax return as a “financial diary”.It contains so much valuable and personal financial information – how much you made last year working, capital gains/loss, interest, dividends, IRA distributions, Social Security benefits, pension benefits, taxable income, your marginal vs. effective tax rate, just to name a few.All of these items help guide us throughout the year to make strategic investment and planning recommendations, based on your current and projected tax situation.As financial planners, we look at your return as a “diary” of what happened in your financial life last year that could help us take advantage of planning opportunities in the future. We do not let taxes be the sole driver in any investment or financial planning decision, however, as comprehensive advisors; tax planning is an integral part of our process of determining what financial choices will benefit you the most.

A team approach adds value for clients

We partner with many tax professionals to keep us all on the same page.By coordinating with other experts, we work as a team to better serve you, our clients.For example, if we are considering completing a Roth IRA conversion for a client, we will contact the client’s tax advisor to get his or her opinion on the conversion and estimate any tax liability or other ramifications.With so many moving parts in financial planning, being able to speak to other experts is key to providing great service and value to clients.

Sharing your “diary” made simple

Because taxes are such an important part of financial planning, we request that clients send us their most recent return once completed each year.Typically, this is something most clients will send to us prior to their annual meeting, however, the sooner we can get them, the better.This allows us to spend more time taking a closer look at the return to see if there are any potential planning opportunities that we can help uncover.We also now have the option for clients to sign a form that authorizes us to contact your CPA or tax advisor directly to have them send us your return once filed to save you any time and hassle it may create.Our goal is to take as much off your plate as possible to make life easier on you.

If you ever have questions on your tax situation or would like to speak to us in greater detail about financial planning, please don’t hesitate to contact us. We are here to help!

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.

You should discuss any tax or legal matters with the appropriate professional.

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

5 Steps to Being Cautious While Still Taking Life’s Chances

In the arena of finance, risk is inherent.  Think about the risks you take everyday. When it comes to investment expectations there is always the risk that the outcome will be different than anticipated. When it comes to the income your family depends upon, there is always the risk of job loss. When it comes to budgeting, there is always the risk of inflation, which could leave you without enough to keep up with the rising cost of things around you. When it comes to your family, there is always the risk that someone could face a health challenge or a long-term illness.

Learning About Risk

After 25 years working with people, I have seen families lose children and grandchildren to tragedy.  I have witnessed divorce and marriage and have seen first-hand financial windfall and destruction. Helping clients through all this has helped me gain a better understanding of risk tolerance and realize that risk preferences vary greatly.  Most people want to avoid risk as much as possible, but many have to learn that the hard way.  Remember your first loss? The big one? How did it affect you? If it was truly the big one, then it made you sit up and take notice.  It left an impression on you and your decisions.  And it may have given you a deeper understanding of what risk really means.

5 Steps to Managing Risk

Despite the fact that we all must learn to live with risk, there are steps we can take to help mitigate the downside when it comes to financial planning:

1. Diversification, asset allocation and rebalancing: While this won’t make you rich quick, it should help reduce overall portfolio volatility.

2. Insurance: For a relatively small cost you can provide for the safety of a young and growing family for many years and provide protection in case of premature death or disability.

3. Emergency Funds: Always maintain the appropriate emergency balance for your situation.  A simple rule of thumb is 3-6 months of expenses. Then you may want to consider choosing investments that are marketable and liquid for your taxable portfolios.

4. Long-term Care Insurance: To avoid a catastrophic financial blow if a spouse develops a long-term illness and needs expensive health assistance, consider long-term care insurance when you’re in your late 50s.

5. Estate Planning:  By taking just a few minutes to write out a plan, there’s a better chance of things happening as you wish. Write a holographic will (handwritten and signed) or go to your state website and pull off the appropriate documents (like wills, powers of attorney, patient advocate designations, etc.). Complete them or set up a meeting with an estate planning attorney to help you with this process. 

If you need help getting started with any of these steps or making a personal plan to help you prepare for life’s inherent risks, contact me at matthew.chope@centerfinplan.com.

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

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

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute investment advice. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protection against loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-005525

6 Tips for Your Tax Return

This March, in honor of Women’s History Month, I’d like to share a little about Muriel Siebert, a legend on Wall Street and a trailblazer for women.  In 1967, she was the first woman to buy a seat on the New York Stock Exchange. This accomplishment, as well as her other successful business ventures and philanthropic activities, helped to expand opportunities for women in finance. 

As March exits and we transition to April, many of us are busy with tax preparation leading up to the April 15th deadline for filing. Now is the time to follow the trailblazing example of Muriel Siebert and blaze a path to your own financial independence. Are you getting a refund?

Here are some tips to help you make the most of this once in a year windfall:

• Ask why you have a refund.  Did you pay too much in the first place? Has something changed in your financial picture? Or is it a forced saving strategy?

• Set some aside. Treat the refund as income and save a minimum of 15% for longer-term goals that are important to you.

• Pay down debt obligations. Especially credit card debt or student loan debt with high interest charges.

• Not maxing out your 401k? A strategy for reducing future taxes is to increase your 401k contribution and then set aside the current refund to help with monthly cash flow if needed.

• Are you saving for college educations? If additional funds are needed, use the refund to put savings goals back on track.

• Splurge! Set it aside for gifts, vacations and other lifestyle choices.

As Women’s History month comes to an end and April  15th approaches, celebrate your commitment to making the most of your financial opportunities. Take a look back at the success you have experienced along the way and continue to step forward into your financial plan for the future.

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. C14-006593

Back Door Roth IRA Conversion

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

A Quick Roth IRA Refresher

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

Who Is Right for a Roth?

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

Lifting the Income Limit for Roth Conversions

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

Back Door Roth Conversion Criteria

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

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

☑ And you have additional funds to save

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

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

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

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

Tax Prep: New Laws & Recent Changes to Help You File

Here at The Center, we think of tax season as the most magical and exciting part of the year, but you might not see it that way.  As you prepare to get your taxes in order, it is important to discuss some of the new laws going into effect for 2014 and to revisit some changes from 2013. Earlier this month, Matt Trujillo and Nick Defenthaler attended a portion of the University of Michigan tax seminar to brush up on the ever-changing landscape in the world of taxes.  Below are a few key points that they felt may impact you:

Expiring Provisions in 2014

• Deduction for expenses of elementary and secondary school teachers

• Option to deduct state and local general sales taxes

• Tax credit for energy efficient home goods (windows, doors, appliances, furnaces, etc.)

  • Don’t let home improvement sales people lead you to believe that the new product they are trying to sell you will generate a tax credit!

  • Elimination of private mortgage insurance (PMI) deduction

    • Consider checking a website such as Zillow or consult with a real estate agent to get an idea of what your home may now be worth.  With the housing market improving, you may now have greater than 20% equity in your home.  Consult with your lender to determine the best steps to eliminating your PMI. 

Reminder of changes from 2013

In 2013, the Medicare tax changes went into effect for “high income earners” based on certain thresholds:

• Single – Modified Adjusted Gross Income (MAGI) greater than $200,000

• Married Filing Jointly – Modified Adjusted Gross Income (MAGI) greater than $250,000

This tax has two components, one based on wages earned above the thresholds and another based on net investment income above the thresholds.

• 0.9% additional Medicare tax on wages above thresholds

• 3.8% tax on the lesser of total net investment income or the amount of earnings above the thresholds (net investment income consists of dividends, interest, capital gains, rental income, etc.  It does NOT include distributions from qualified retirement plans such as an IRA or 401k)

• Ex.  A married client’s MAGI for 2013 is $300,000.  They also have $20,000 of net investment income.  They are $50,000 over the $250,000 threshold.  However, the $20,000 is less than the $50,000 overage; therefore, the 3.8% tax is based on the $20,000, resulting in an additional tax of $760 ($20,000 x 3.8%). 

Affordable Care Act (Obamacare)

One of the biggest tax talking points for 2014 are the tax ramifications of the Affordable care act or “Obamacare”. A few key take-aways for 2014:

• it's widely known that the penalty (in 2014) for not having insurance is the greater of $95 or 1% of income - this penalty will increase for the next several years to entice people to get health insurance.

• For those individuals or families that are between 100% and 400% of the federal poverty level, you may qualify for a government subsidy to help offset your insurance premium costs.

• In 2014 you will need to use a combination of last year’s earned income, and your projections of this year’s income to figure out whether or not you qualify.

• If you find you are right on the cusp of qualifying for a subsidy, but are concerned about having to pay back the subsidy in full if you underestimate your income ... fear not!  The rules regarding income are a “cliff”, meaning if you are wrong by $1 dollar you are subject to a penalty. However, the maximum penalty for 2014 is $400.

Example: Joe and Jane are 55 with no dependents.  They estimate their income to be $62,000 and that qualifies them for a government subsidy.  However, Joe gets an unexpected bonus at the end of 2014 and his income ends up being higher than 400% of the federal poverty level.  In this scenario, Joe and Jane will be subject to a maximum $400 penalty.

Tax planning can be very confusing, especially since the IRS seems to change the tax code more often than electronics companies push new products.  Please don’t hesitate to contact us if you have questions about your personal tax situation. Although we are not CPAs, we can still help to make your overall financial plan as tax efficient as possible and work together as a team with your tax professional to ensure we are all on the same page.

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.

Matthew Trujillo 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.

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 opinions are those of Center for Financial Planning, Inc. and not necessarily those of RJFS or Raymond James. Please note, changes in tax laws may occur at any time and could have 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. All examples are hypothetical. Please consult the appropriate professional if you have questions about these examples and how they relate to your own financial situation. C14-002577

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

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

Penalty-free IRA Withdrawals

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

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

How to Use Rule 72(t)

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

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

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

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

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

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