Las Vegas Trusts and Estates

IRA Needs Attention when Included in Estate Plan

Your IRA can become a legacy left to your heirs.

If you decide you don’t need your Individual Retirement Account (IRA) to fund your retirement, you have some options to fit it into your estate plan. However, beware the potential complications, according to the Oakdale Leader in “Leaving An IRA As An Inheritance.”

If no beneficiary is named to the IRA, things can get complicated for both the estate and the heirs. If the IRA has a named beneficiary, but the will names someone else to receive the IRA, the beneficiary named in the IRA is the one who receives the asset. The named beneficiary in any account and especially an IRA, supersedes the will, in almost every instance.

Anytime there is a significant event, often called a “trigger” event, like a divorce, marriage or birth, the estate plan and all accounts with named beneficiaries should be reviewed. This is to ensure that the assets go where the owner wants them, and not to an unintended heir, like an ex-spouse.

There are special rules for spouses, where IRAs are concerned. Married couples typically name each other as beneficiaries on their IRAs. A surviving spouse has certain decisions to make, when inheriting an IRA. The IRA may be rolled over into a new or existing IRA in the spouse’s own name. Taking this route depends upon the age of the spouse and the need for the money.

Another option is to convert the inherited traditional IRA into a Roth IRA. However, taxes must be paid on the conversion. It is also possible to transfer the IRA assets into an inherited IRA. An estate planning attorney will be able to explain all the options and how they will work with the surviving spouse’s estate plan.

To maximize the growth of the IRA, children or grandchildren can be named as IRA beneficiaries. They will need to start taking annual Required Minimum Distributions (RMDs) immediately, and the distributions will be taxable. However, the amount of the RMD will be based on their anticipated lifetimes, so the taxable distributions will be relatively small. The money in the account will have many years to grow.

When children or grandchildren are named as contingent beneficiaries, a surviving spouse has the option to disclaim the IRA, which allows the children or grandchildren to inherit the IRA and enjoy the tax-free years of growth.

Many advisors counsel against naming an estate as a beneficiary, because it helps avoid probate and strict distribution time limits.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and may include an IRA.

Reference: Oakdale Leader (Feb. 19, 2019) “Leaving An IRA As An Inheritance”

Reducing Your Income Taxes During Retirement

There are other options than the traditional 401(k).

Creating a tax-free income is a good way to prepare for retirement, according to CNBC in “3 tips to help boost your tax-free income in retirement.”

You can start by taking a look at the Roth IRA and the Roth 401(k). Unlike a traditional IRA, with a Roth IRA, you pay taxes when you make your contribution to the account, then the funds then grow tax-free over time and, as long as you meet certain conditions, there are no taxes on withdrawals. With a Roth IRA, there are none of those pesky RMDs (Required Minimum Distributions). However, there are withdrawal distribution requirements for a Roth (401)k.

Most employers offer Roth IRA and Roth 401(k) accounts, so there’s a good chance they are offered by your employer.

Roth IRAs are often offered along with their counterpart, the traditional 401(k). Between the two of them, it’s possible to save as much as $19,000 in 2019. For those workers who are 50 and over, you can add $6,000 as a catch-up contribution.

The power of the Roth 401(k) is the tax-free compounding that takes place over time. Don’t miss out on this, if you want to max out your tax-free savings.

There are two different types of Roth plans: the Roth 401(k) and a Roth IRA. Roth IRA plans have income limits. If your modified AGI (Adjusted Gross Income) is more than $137,000 for a single and $203,000 for a couple filing jointly, you aren’t allowed to make a direct contribution to a Roth IRA. However, there are no income caps for Roth (401)k. You can also save more for retirement in a Roth 401(k), compared to a Roth IRA. Roth IRAs are also subject to annual contribution limits: $6,000 in 2019, plus a $1,000 catch-up contribution, if you are over age 50.

Here are three steps to make your retirement savings more tax free:

Can you do an in-plan conversion? If your employer offers a Roth 401(k), you may be able to convert some of your traditional 401(k) savings to the Roth. This is called an in-plan Roth conversion. Just like a direct contribution to a Roth 401(k), it will be taxable. Therefore, make sure that you run the numbers before moving funds. You’ll be responsible for taxes on pretax principal and earnings. Don’t do it all at once, so that you don’t find yourself moved into a higher tax bracket.

What does your plan allow? If you’ve left your employer and have money in both a traditional 401(k) and a Roth (401)k, you might want to convert those accounts — if your retirement plan allows it. Remember that you may not write a check from an outside bank account to add after-tax money to a Roth 401(k).

What’s your time-frame? Just as young workers are in the best position to save early and often, they are also in the best position to make the most out of Roth savings accounts of all types. It’s likely that younger workers have not yet reached their full career and earnings stage, so now is the best time to put money into a Roth 401(k). When incomes are higher, so will taxes on Roth retirement account contributions. If you’re close to retirement, there are other timing factors to consider, primarily Medicare. How much you pay for Medicare Part B and D, which covers doctor’s visits and prescription drugs, depends upon your modified gross income from two years ago. Do the conversion to a Roth at age 62, if you intend to file for Medicare at age 65.

An estate planning attorney can advise you in creating an estate plan that fits your unique circumstances and incudes retirement planning.

Reference: CNBC (Feb. 10, 2019) “3 tips to help boost your tax-free income in retirement”

You Most Likely Will Face Taxes on Retirement Accounts

IRS doesn’t care if you are working or not … withdrawals are mandatory.

This is important! Do not miss the IRS deadline on withdrawals from retirement accounts once you pass that 70^th birthday, according to Money, in “Don’t Miss This Key Tax Deadline.”

The problem is, the IRS doesn’t care whether you are working or want to start taking withdrawals. It also does not care if you want that money to keep growing. The agreement you made back when you started putting money into those accounts, was that you could contribute pre-tax dollars and deferred paying income tax on that money and any earnings. However, once you turn 70½, withdrawals are necessary.

Starting the year that you turn 70½, Required Minimum Distributions or RMDs begin, and you must pay ordinary income taxes on it. The penalty is expensive: you’ll have to pay the IRS half of what you should have withdrawn, so you don’t want to miss this deadline.

A recent survey from Nationwide showed that only 13% of people who are 65 and still working, were able to identify when they will need to start taking RMDs. The RMD is a percentage of your total assets based on your age and life expectancy. Let’s look at these two general examples: say you are 70½ this year, and you have $200,000 in assets–your RMD is $7,300. If you are 76 and have the same asset value, then you owe the IRS $9,100. Your tax liability for RMDs should be calculated with the help of your estate planning attorney and your accountant.

How you take these distributions could have a big impact on your tax bill. For many people, the RMD bumps them into a higher tax bracket when they are combined with other retirement income sources. Another question to address is: how will the distribution impact your Social Security benefit?

By the time you start getting those notices in the mail, you should have an idea of what your retirement income will be and how to make the RMDs work within your budget. What is the biggest problem that people run into? They don’t know about these required distributions, or their tax liability, and are suddenly faced with a penalty on top of a tax bill. It’s not a happy surprise.

Roth accounts offer considerable flexibility, since the money you withdraw is post-tax. They are not subject to RMD rules, while the owner is living. RMD rules for Roth 401(k) accounts do apply.

The only way to completely avoid RMD taxes is to donate the RMD to a qualifying non-profit institution. This is a way to avoid taking the RMD, if you don’t need the income. You will avoid paying any taxes on it. There is a $100,000 annual limit on this generous strategy.

Another strategy if you don’t need the proceeds from the RMD: use the money to open a 529 college fund for a child or grandchild and fund that account. You’ll still have to pay taxes on the RMD, but the college savings account will grow tax free.

An estate planning attorney can advise you on an estate plan that fits your unique circumstances and could include retirement fund withdrawals.

Reference: Money (January/February 2019) “Don’t Miss This Key Tax Deadline”

Planning Retirement? Get Started Now!

An important consideration when looking toward retirement, is the less debt the better.

It is always a good idea to be planning for your retirement but if you feel that 2019 is the year for you than it would be best to get moving on it now, according to CNBC in “If you’re planning to retire in 2019, here’s how to make sure you’re prepared.”

The main thing is if you are planning retirement, working while retired or still thinking about it, then you want to begin the preparation as soon as possible and right now would be a really good time.

While we hope your retirement was planned, many of the people who retire—60%—do so because of health issues or because they were laid off and could not get another job. Others have continued to work long after they expected to, sometimes because they don’t see a reason to not keep working.

Whatever category you fall into, your first look should be at your finances.

Do you know what your expenses are? You can’t know how much you’ll need for retirement, unless you know what you are spending right now. Maybe you won’t be buying expensive suits for a sales career but you’re still going to need to buy clothing. If you are like most retirees, you’ll want to fill your free time with all of the recreational pursuits you couldn’t do when you were working. That may include travelling, entertainment, sports and other activities—all of which cost money.

Pay off any debt you can. The less debt, the better.

Healthcare is one of the most overlooked costs for retirees. Once you reach 65, you’re eligible for Medicare. If you retire at or past that age, the program is available to you. However, it does not cover everything. The single most expensive item not covered: long-term care. Dental, vision and hearing care are not covered either.

You will also need a Social Security strategy. You can file for benefits any time after age 62, but you’ll increase your benefits by some 6% to 8% every year if you delay filing up to age 70. We don’t see those kinds of returns too often. If you work part time, you’ll need to find out how that income impacts your monthly benefits.

Even though you’re retired, you have to pay taxes. Your taxes will depend on what kind of retirement accounts you have: traditional IRAs, 401(k)s, Roth IRAs, etc. Not all sources of income are taxed the same way.

An estate planning attorney can advise you on creating an estate plan that fits your unique circumstances. If you already have an estate plan, it would be wise to consider taking a fresh look at it, because life changes can also change your circumstances and intentions.

Reference: CNBC (Nov. 4, 2018) “If you’re planning to retire in 2019, here’s how to make sure you’re prepared.”

Save for Retirement and Don’t Make IRA Mistakes

Want a nest egg when you retire? Start early and save often.

By now, we are all pretty much aware that an IRA is a good way to support your retirement efforts. However, it is also important to avoid mistakes along the way, according to Born2Invest in “Retirement planning: 8 common IRA mistakes.”

Avoid these classic errors and keep that IRA growing!

Not contributing. This is the biggest mistake of all. Most of your retirement income will come from money you saved while you were working, not the gains they earn. Missing a single year means missing out on the compounded growth that occurs over time. Save as much as you can.

Not contributing enough. Traditional IRAs and Roth IRAs let you contribute $5,500 every year. Once you turn 50, there’s a catch-up contribution so you can contribute up to $6,500. Saving the maximum amount, lets you enjoy the benefits from a tax and savings perspective.

Examining tax benefits. There are different rules for Roth IRAs, different rules for traditional IRAs and (you guessed it!) different rules for 401(k)s. Educate yourself about the different benefits that each offers. If you’re in a high tax bracket now and expect to be in a low tax bracket later in life, you might want to use a traditional IRA. However, for the opposite, a Roth might be your best bet.

Don’t forget the distributions. This is one of the costliest mistakes that people can make. Traditional IRAs have Required Minimum Distributions (RMDs) that require you to take out a certain amount starting when you turn 70½. Did you miss the window? Tax penalties are steep: up to 50%. Roth IRAs don’t have RMDs, except when the account is inherited by a non-spouse beneficiary.

Pick the right retirement account for you. Far too many people just pick a traditional IRA without exploring other options. Maybe a SIMPLE or a SEP would be right for you. If you’re self-employed, there are several different retirement accounts, and you may be able to put away more pre-tax dollars.

Don’t miss rollover deadlines. When you change jobs, you can roll over an old 401(k) to an IRA with no tax penalty. However, those funds have to make it to the new account within 60 days. Best bet: do a direct rollover and remember you can only do this once every 365 days, for all your IRAs.

Invest wisely and effectively. IRAs give you some degree of choice over where you invest. Don’t just opt for the most conservative funds; diversify with a balance of higher risk and return vehicles and more stable, low-interest ones. Don’t put your money at risk but don’t let it stagnate either.

Forgetting to name beneficiaries. Just like other investment accounts, you’ll need to name a beneficiary for your retirement accounts. What your will and other estate documents say does not have any impact on the distribution of assets in your retirement accounts. You must name beneficiaries, and if possible, successor beneficiaries, so your assets go where you want them to.

An estate planning attorney can advise you in creating an estate plan that fits your circumstances.

Reference: Born2Invest (Sep. 11, 2018) “Retirement planning: 8 common IRA mistakes”

Explore the Options Beyond Roth or IRA

Retirement offerings generally begin with 401(k) and IRA. However, there is a world beyond them, when looking to save for your retirement years.

Even though an IRA is the most common offering by companies to employees to plan for their retirement, there are options beyond the norm, according to Forbes in “10 Retirement Accounts You Should Know About.”

Few of us need less money in our retirement accounts. Most of us enjoy the tax benefits we get from retirement accounts. Americans, in general, do a terrible job of saving for retirement. Some say the IRA, Roth IRA and other similar accounts were created to give us an incentive to do a better job. The tax advantages of these accounts make it more attractive to sock away money every year. These accounts were also set up with deliberate penalties, so people wouldn’t raid their accounts every time they needed a few extra dollars.

If you are among those who work for companies that have a retirement savings plan match, make the most out of it. If you put in the annual percentage or amount your plan requires, your employer will match that contribution. Most workers walk away from this money. However, it’s free money!

Employees usually are offered a 401(k), 403(b) or 457 plan from their employer. The financial institution is already chosen, the money is automatically taken out of your paycheck and often you can only make decisions about what kind of funds you can select at certain times of the year. In 2018, you can contribute up to $18,500. If you’re 50+, you can make an additional $6,000 contribution, known as a catch-up contribution.

Self-employed? You need a retirement plan more than someone who works for a company. Self-employed people have many more options. If you need help, talk to your CPA. There may be some plans that are better suited or have more tax advantages than others.

For self-employed people, the basic choices are the solo 401(k) for a sole proprietor or someone working with their spouse. You can make contributions as both the employer and the employee. You could contribute as much as $55,000 in 2018 (or, if you are 50+, $61,000). Your total contributions are determined by your net business income.

Another choice for retirement savings for the self-employed is a SEP IRA, the Simplified Employee Pension. It’s easier to set up than a 401(k)and is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to a quarter of your income, or $55,000, or whichever is less. There are no catch-up contributions for a SEP IRA.

Self-employed or working for a company, your retirement plan needs to include an estate plan. Your estate planning attorney will be able to help you with a will, power of attorney and healthcare directive.

Resource: Forbes July 23, 2018 “10 Retirement Accounts You Should Know About”

Take a Good Look at Taxes at the Halfway Point

Mid-year tax planning gives you the opportunity to make any changes you think are necessary.

It is always a good idea to take a mid-year look at tax planning. However, it is especially important this year because of the new tax laws, according to Kiplinger’s article “Midyear Moves for Retirees to Rein In Their Tax Tabs.”

You could miss some real opportunities to make changes, because some taxpayers may find that they owe less taxes this year, while some will owe more. You might decide to switch from itemizing to taking the increased standard deduction. It is also possible that you’re not going to pay the AMT (alternative minimum tax) this year.

Ramp Up Your Nest Egg. Are you still working? Then max out contributions to your retirement funds to help lower your taxable income. If you are 50 and older this year, you can put away as much as $24,500 in a 401(k) and $6,500 in an IRA.

Build Health Savings Accounts. If you have an HSA, be smart and put away as much as you can. Workers with HSA-qualified health coverage can contribute $6,900 in 2018 and those with self-only coverage can squirrel away as much as $3,450. If you’re 55+, you can put in an extra $1,000. HSAs are a great tax saving tool: the money goes in pre-tax, grows tax-free and when used to pay qualified medical expenses, is withdrawn tax-free.

Consider Your Deduction Strategy. The standard deduction in 2018 is rising to $12,000 for singles and $24,000 for marrieds filing jointly, so this is the year to figure out whether to itemize. Tax reform has also limited itemized deductions. The write off for state and local income, sales and property taxes is now capped at $10,000. Seniors (65 and up) can still take an extra standard deduction of $1,300 per person for joint filers and $1,600 for singles. For a married senior couple, itemized deductions would have to be more than $26,600. If the couple uses the full $10,000 write off for state and local income, sales and property taxes, they have to come up with more than $16,600 in deductions to save by itemizing.

Medical Expenses. The medical expense deduction is still in place. It’ is better in 2018, since the threshold dropped to 7.5% of adjusted gross income. Next year, that threshold rises to 10%. If possible, you should consider bunching medical costs into 2018, so that you can take advantage of that lower threshold.

Roth IRAs. Putting money in a Roth this year won’t cut your 2018 taxes. However, if you expect tax rates to climb, now is the time to put money in a Roth and pay taxes now, rather than later. Tax reform took away the ability to reverse a Roth conversion starting in 2018, so wait until the end of the tax year when you have a clearer vision of your numbers to do any conversions.

Reference: Kiplinger (June 29, 2018) “Midyear Moves for Retirees to Rein In Their Tax Tabs”

Retirement Savings Options for Self-Employed

Unlike people who work for an employer and can set automatic deductions for their IRA accounts, self-employed people need to set up and contribute to retirement accounts. Two of the most frequently used accounts are the Simplified Employee Pension (SEP-IRA) and the Solo 401(k). Contributions to both are tax-deductible, allowing the entrepreneur to obtain tax-deferred growth and cut taxes.

Figuring out which retirement account is best for your circumstances will be easier after reviewing this article in Physician’s Money Digest, “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan.”It lists the pros and cons of each of these two accounts, along with a general description of each.

An SEP-IRAis similar to a traditional IRA in that the investment earnings grow taxed-deferred until they are withdrawn. However, a self-employed individual can save and deduct much more than the $5,500 ($6,500 if 50 and over) for contributions to a traditional IRA. SEP-IRA contribution limits are calculated as the lesser of 20% of net business income or $52,000 for 2014, $53,000 for 2015.

A Solo 401(k) is for self-employed individuals with no employees. Your spouse is not included in the employee count and is permitted to contribute to the plan if he or she is employed by the business. This 401k can be structured as a traditional 401(k) or as a Solo Roth. The maximum 2015 contribution is $53,000 or $59,000 for those 50 and older. The contribution includes (i) an annual employee deferral up to 100% of compensation or earned income for a self-employed individual (to a maximum of $18,000 and $24,000 if 50 or older), which allows some to contribute more to a Solo 401(k) than to a SEP-IRA; and (ii) an employer discretionary contribution of up to 25% of compensation as defined by the plan or 20% of earned income for a self-employed individual.

One advantage a 401(k) offers over an IRA is that you can borrow from a 401(k). If you opt for Solo Roth 401(k), there’s no deduction, but withdrawals are tax-free if you wait until you’re 59½. The plan lets you save much more than a Roth IRA. Another advantage for the Solo Roth 401(k) is that contributions aren’t subject to income limits (unlike the Roth IRA).

Which is better… a Roth or traditional IRA?It depends on many factors. If you expect to be in a higher tax bracket in the future, the Roth version may make more sense, but if your current tax rate is low, it might be better to forgo a deduction now in order to withdraw money tax-free when you’re in a higher bracket in the future. What’s nice is that it doesn’t have to be an “either-or” proposition: you can have both traditional and Roth 401(k) plans and divide contributions between them.

For most self-employed individuals, the SEP-IRA may be a better choice than a traditional IRA because the contribution limits are much higher. Also, deductions for traditional IRA contributions are limited by income for participants who are covered or whose spouse is covered by a retirement plan at work.

Talk to a qualified estate planning attorney to see how these IRA options may fit into your strategy.

Reference: Physician’s Money Digest (August 27, 2015) “Self-Employed Can Still Cut 2014 Taxes with a Retirement Plan”