Category: Asset Protection and Retirement Planning

IRS Is Not Fooling Around With Retirees on April 1!

Posted on March 8, 2019March 10, 2019 by PM Editor

Although many retirees may not need to withdraw money from their retirement accounts (IRAs, SEP IRAs and 401(k) plans to name a few), April 1st could cost some of them as much as a “50% excise tax” if they do not take any contributions, and this is no April Fools’ Joke!

The Reason & Who’s Affected?

As delightful and rewarding as tax-deferred retirement saving plans like IRAs can be, there is a very important IRS Rule known as Required Minimum Distributions (RMDs) that needs to be observed or the penalties can be severe. Generally speaking, all taxpayers (there are a few exceptions we will discuss later) with these types of accounts must start taking mandatory minimum distributions from their retirement accounts once they reach the age of 70½. The importance of the April 1st deadline is that it applies to the first year after which a taxpayer turns 70½. Going forward each taxpayer is required to take the RMDs by the end of each calendar year (we provide the IRS worksheets to calculate the required minimum amount of distribution below). There is a caveat, if you are retired and your 70th birthday was say July 1, 2018. You reached age 70½ on January 1, 2019. You do not have an RMD for 2018. You must take your first RMD (for 2019) by April 1, 2020. Of course, for those who turned 70½ June 30th or earlier in 2018, you must observe the upcoming April 1st deadline.

Failure To Take The Required Minimum Distribution

The consequences for failing to take the Required Minimum Distributions (RMDs) can be severe, as taxpayers would be subject to pay an excise tax of up to 50% on the amount not distributed as required. The IRS is flexible regarding how you can choose to take your RMD. For instance, if you have more than one account that is subject to the Required Minimum Distributions (RMD), you can elect to withdraw the combined RMD from one account, provided that the total minimum for all accounts is withdrawn during the calendar year in question.

RMDs

What Plans Are Subject to RMDs?

The minimum distribution rules apply to:

traditional IRAs
SEP IRAs
SIMPLE IRAs
401(k) plans
403(b) plans
457(b) plans
profit sharing plans
other defined contribution plans

* Roth IRAs do not require withdrawals until after the death of the owner.

Below you will find the IRS RMD Worksheets:

IRA Required Minimum Distribution Worksheet

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(Source: https://www.irs.gov/)

IRA Required Minimum Distribution Worksheet (if your spouse is the sole beneficiary of IRA and he or she is more than 10 years younger)

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(Source: https://www.irs.gov/)

Business Owner Retirement Plans

Posted on January 16, 2019February 20, 2019 by PM Editor

Retirement Plan Options For Business Owners

Business owners, who are often burdened with many challenges building and running their businesses, too often miss special retirement plan opportunities available to businesses, instead electing to rely on their personal retirement plans instead. Below are a few options that business owners should consider.

Profit-Sharing Plan (DPSP)

A profit–sharing plan, also known as a deferred profit–sharing plan or DPSP, is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). Under this plan, an employee receives a percentage of a company’s profits based on its quarterly or annual earnings. The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.

Simplified Employee Pension Plan (SEPs)

SEP plans are ones in which an employer contributes on a tax-favored basis to IRAs owned by its employees. If the employer meets certain conditions, it isn’t subject to the reporting and disclosure requirements of most retirement plans. One of the distinctive advantages of a SEP plan, is that they can be established in one year and contributions are deductible as late as the due date of income tax returns for the previous year, including extensions.

Per the IRS rules regarding participation, Employees must be included in the SEP plan if they have:

attained age 21;
worked for your business in at least 3 of the last 5 years;
received at least $600 in compensation (in 2016 – 2019) from your business for the year.

Your plan may use less restrictive requirements, for example age 18 or three months of service, to determine which employees are eligible.

Defined Benefit Plans

Also known as a traditional pension plan, Defined Benefit plans promise the participant a specified monthly benefit at retirement. These plans can state an exact dollar amount (e.g. $1000 per month at retirement) with a maximum annual benefit capped at $220,000 (as of 2018) or 100% of the average earned income for the highest three consecutive years, whichever is less. Most often, the benefit amount is calculated through a plan formula that considers such factors as salary and service. Like SEPs, business owners and plan participants can make deductible contributions until the due date of income tax returns for the previous year, including extensions.

Retirement planning can be a daunting task for even the most sophisticated business owners, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your retirement planning strategies.

Understanding The New Tax Code: Estate Planning 2018

Posted on December 10, 2018February 20, 2019 by PM Editor

2018 Estate Planning

Most of the media coverage and attention on the new tax code, The Tax Cuts and Jobs Act (TCJA), have been focused on changes to income taxes (individual and corporate) and their respective brackets. Although the new law did not “repeal” the Federal Estate Tax, it does include some provisions that could impact some tax payers and their estate planning.

Exemption Increases

The biggest change in the new tax code regarding estate planning is that it more than doubles the exemption amounts for gift and estate tax exemptions and the generation-skipping transfer (GST) tax exemption, from $5.49 million for 2017 to $11.18 million (or $20 million for married couples with proper planning) for 2018. The top marginal rate for all three taxes remains at 40% — only three percentage points higher than the top income tax rate.

This is good news for those with large estates, however absent congressional action, the exemptions will revert to their 2017 levels (adjusted for inflation) in 2026. Although these “doubled exemption” amounts only affect a small population of taxpayers, it is important for those with estates in the roughly $6 million to $11 million range (double that for married couples) to consider making tax-free asset and wealth transfers prior to 2026 when the higher exemption amounts are set to expire.

It is important to consider however for taxpayers not affected by the above exemption amounts it may behoove them to hold assets until death. Specifically, when a a taxpayer gives away an appreciated asset the recipient takes over their tax basis in the asset which would trigger a capital gains tax should the recipient turnaround and sell it. On the contrary, when an appreciated asset is inherited, the recipient’s basis is “stepped up” to the asset’s fair market value on the date of death, which could significantly reduce (or even erase) the capital gain. Hence, retaining appreciating assets for taxpayers with estates less than $11 million ($22 million for married couples) can you save your heirs a significant amount of income taxes.

It is also important to keep in mind that some states have their own estate taxes whose exemption amounts are almost always lower than the federal amounts.

Updates to Section 529 plans

Another key change brought with the new tax code has been the expansion in tax benefits for 529 plans. Many tax professionals have long been proponents for families using 529 plans to grow money tax-free for their children’s education. Previously, 529 plans could only be used for eligible colleges and universities, but the TCJA now allows them for private, public, and religious kindergarten through 12th grade – up to $10,000 per year per child. This lucrative savings method for families can also be extended to other relatives like grandparents who can pare down their estates by making contributions to 529 plans while benefiting their grandchildren and their education.

The complexity of estate planning can be a daunting task for even the most sophisticated taxpayer, therefore it is always a good idea to consult a tax professional like those found at TaxPM who can help you review, and if necessary revise your estate planning strategies.

Tax Planning for Retirement: Things to Remember

Posted on June 1, 2018February 20, 2019 by PM Editor

Many people look forward for the day they retire. This is the time when they can relax and enjoy the fruits of their labor. But, regardless of how you want to spend your retirement, having a good tax strategy and plan for retirement is a must.

It is important to understand that there are many potential tax events that can be triggered when handling your retirement assets and financial transactions. With the help of tax experts like TaxPM you should be able to optimize your tax strategy. In any case, you should take a few things into consideration.

Asset Protection

According to many experts in this area, if you want to improve your asset protection, you will have to diversify your retirement assets. Use different vehicles like investments and insurance products to keep your assets safe. You should also think about the tax laws and regulations that may eventually affect your sources of income.

Now let’s consider some of the sources of income generated by retirees.

401 (k)

As you are probably aware, a 401 (k) represent a retirement savings plan sponsored by your employer/s. (1) With its help, you can save and invest a part of your paycheck before the removal of taxes. But, you should keep in mind that 401 (k) distributions are completely taxable. This is quite logical because the contributions were made before taxation.

Roth IRA

When it comes to Roth IRA, you should know that there are no deductions for the contributions. In other words, they act as so-called after-tax funds. People are free to withdraw contributions from the plan at any point, however depending on age there are often taxes and/or penalties applied to the transaction. In other words, Roth IRAs could be a more flexible option compared to traditional IRA.

SEP IRA

SEP IRA is the ideal solution for self-employed persons who want to make sure that their retirement plan will get them significant income in the future. It’s also good for sole proprietors. Many people use a SEP IRA to create tax-deductible contributions for the last year. It’s possible to change the amount you contribute at any time of the year.

Traditional IRA

Traditional IRA has deductible contributions, but only from current income. (2) So, when there are withdrawals of contributions at retirement, they are taxable as any ordinary income. The same goes for the income. Generally speaking, those who belong to the lower tax bracket can expect significant, permanent tax savings with Traditional IRA. Keep in mind that the income is taxed equally no matter what kind of origin it has – interest, dividends or capital gains.

Proper tax planning for retirement depends on your income, goals, qualified plans and tax filing status. Use professional advice whenever you are making a plan like this. TaxPM is here to help you.

(1) http://money.cnn.com/retirement/guide/401k_basics.moneymag/index7.htm

(2) https://www.irs.gov/retirement-plans/traditional-iras