Financial Planning in Jefferson City and Central MO

For most taxpayers, you have until April 15th of the following year to contribute up to $5,500 ($6,000 in 2019) and $6,500 if age 50 or over ($7,000 in 2019) into a Traditional IRA or a Roth IRA. Is an IRA an option worth considering for you? If so, which is better?

Traditional IRA

A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account. Tax is only paid on the money once it is withdrawn. After the account holder reaches age 70 1/2 you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed ("after-tax" dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions.

Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.

Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.

Roth IRA accounts have more flexible contribution and withdrawal rules.

So the answer is. . .it all depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA.

If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.

Remember you have until you file your tax return (excluding extensions) to make a contribution to a Traditional IRA or Roth IRA. This is typically April 15th following the end of the plan contribution year.

The annual contribution amount is $5,500 ($6,000 in 2019) or $6,500 if you are age 50 or over ($7,000 in 2019). Prior to making the contribution, if you or your spouse are an active participant in an employer's qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain income thresholds.

Note: Married IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer's qualified plan, the income phase-out to contribute is $0 - $10,000.

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.

Don't forget to look at the retirement specials on the tax menu

Wouldn’t it be nice to check out of the workforce early and not have to worry about having enough for retirement? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.

Maximize tax advantaged retirement accounts. Retirement accounts like Traditional IRAs and 401(k)s allow qualified taxpayers to save pre-tax money, invest the funds, and not pay taxes until the funds are withdrawn during retirement years. The IRS still receives their tax on your income and earnings, but they delay receiving the funds until you withdraw them in the future. In other words, the IRS allows you to invest their potential tax receipts along with your money and will take their share of your investment earnings at a later date.

Leverage the “catch-up” provisions within retirement accounts. Most retirement accounts allow older taxpayers to invest even more money in these retirement savings accounts. The key retirement fund limits are noted here:

Retirement Plan 2018 Maximum

Contribution Age 50+

Catch-up Total Maximum

Contribution

401(k), 403(b), 457 $18,500 $6,000 $24,500

Traditional/Roth IRAs $5,500 $1,000 $6,500

SIMPLE IRA $12,500 $3,000 $15,500

Consider Tax Free Retirement Choices. Roth IRAs and Roth 401(k)s are an interesting alternative to other qualified retirement plans. Within Roth accounts you invest money in your plan with “after-tax” dollars, but any earnings are tax-free as long as you follow the withdrawal rules. While this lowers your potential initial investment, you have created a source of funds that can earn money without being taxed in the future. If you expect tax rates to go up during your retirement years, perhaps a Roth IRA should be included in your retirement portfolio.

Roth Rollovers. You may also roll money from most qualified retirement accounts into Roth retirement accounts. When you do this, you must pay the tax on the funds rolled over, but the rollover makes any future earnings within this account tax-free as long as you follow the distribution rules. In the past, you were unable to do this type of rollover if your income exceeded $100,000.

Consider Health Savings Accounts and their “catch-up” provisions. Health Savings Accounts allow you to set aside money to pay for qualified health expenses in pre-tax dollars. To be eligible to set up this type of savings account, you must be in a qualified high deductible, medical insurance plan. The good news is that unused funds can be invested and carried forward to future years. These funds can then be used to augment your retirement plan.

Consider state taxes. Part of your retirement plan should be understanding where you wish to live. It is important to note that states are not created equal on this front. Many states have no state income taxes, while others like Hawaii, are in excess of 10 percent. And you must project where your chosen state might be in the future. In Minnesota, for instance, recent proposals would make that state’s taxes among the top taxed states in the nation. Many states are also trying to take the position that you must pay them state taxes on all retirement plan withdrawals from money earned while you lived in their state, even though you moved ten years ago! This problem will not go away as long as governments continue spending programs in excess of tax collections.

Consider additional deductions and benefits. There are also a number of other benefits that should be considered as you reach retirement age. These include:

the additional standard deduction when you reach 65

the credit for elderly/disabled

the timing of when to commence social security benefits

the impact of Medicare and Medicaid plans

the potential taxability of retirement benefits including social security and pension plan income

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA during retirement, it is quite another when you pay the tax PLUS a 10 percent penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:

Medical Insurance Premiums if Unemployed. If you have been receiving federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.

Qualified Higher Education Expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10 percent penalty.

Medical Expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 10 percent of your Adjusted Gross Income you may do so penalty-free.

First-Time Homebuyer Expenses. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. Even better, to qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.

Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10 percent penalty.

You're the Beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.

Qualified Reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10 percent penalty.

Annuity Distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life (or your life expectancy)”. This option is complicated and must use an IRS-approved distribution method to qualify.

Some Thoughts.

Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.

While the above events allow you to avoid the early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.

While generally the same, the 10 percent early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.

Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

Understanding Required Minimum Distribution (RMD) Rules

Every year thousands of taxpayers are hit with a heavy 50 percent penalty for not withdrawing enough money from their retirement plan(s). Here is what you need to know to ensure this does not happen to you or someone you know.

Who is subject to Required Minimum Distribution (RMD) rules?

Anyone who participates in a qualified retirement plan like IRAs (traditional, SEP, SARSEP, and SIMPLE), Roth 401(k), 401(k), 403(b), 457(b) and profit sharing plans AND

is 70 ½ years or older,*

who is generally retired OR

who is the beneficiary of a plan

Exception: Owners of qualified Roth IRA accounts

The confusion of multiple tables

To determine the amount that must be withdrawn each year you need to go to the correct life expectancy table published by the IRS in Publication 590. There are three tables:

Joint & Last Survivor.

When to use: Your spouse is the sole beneficiary AND your spouse is more than 10 years younger than you.

Uniform Lifetime Table.

When to use: Your spouse IS NOT more than 10 years younger than you OR your spouse is not your sole beneficiary

Single Life Expectancy.

When to use: You are a beneficiary of another account

How much do I need to take out and when?

Once you find the correct table, determine your life expectancy and divide the result by the balance in your account as of December 31st of the previous year.

The amount must be withdrawn by December 31st of the year. Exception: in your initial RMD year you have until April 1st of the following year to withdraw the funds.

Thankfully, many retirement account administrators will make the RMD calculation for you. But it is still your responsibility to ensure the calculation is correct.

The deadlines are strict so don’t miss them. The 50% penalty can be applied each year, so the impact can be dramatic over time. On the other hand, if you are penalized and have a defensible reason you did not take the RMD, you should try to get the penalty reduced or eliminated.

Remember to conduct the calculation each year. Not only do life expectancy numbers change as you age, so does the balance in your retirement savings accounts.

Some Tips to Help Never Forget

Want to make sure this doesn’t happen to you? Here are some tips.

Calculate the RMD for each account in early January each year. Set up automatic periodic withdrawals from the account to accommodate the RMD.

Make a review of your accounts part of your tax planning each year.

Ask for help. At first, finding the correct life expectancy table and determining the correct calculation can be overwhelming. Have someone review your calculations until you feel comfortable with the process.

Connect your RMD to a key event like your birthday or anniversary. Then give yourself the additional gift of a payday out of your retirement account.

* Can be later if you are still actively working. If, however, you are a 5 percent or greater owner of the business sponsoring the retirement plan you must take an RMD when 70 ½ whether retired or not.

Roth Conversions

The Roth IRA has been widely discussed and analyzed. One of the most challenging questions this retirement vehicle brings up is whether or not you should convert your existing IRA to a Roth IRA.

How the Roth IRA works:

You're allowed to contribute up to $5,500 to a Roth IRA in 2018 ($6,000 in 2019) plus an additional $1,000 if you are 50 or older, the same as any other IRA, but your contributions aren't tax-deductible. However, there's an important, offsetting benefit: Principal and earnings in a Roth IRA may never again be subject to federal income tax, and a Roth IRA isn't subject to mandatory distribution requirements.

Example: Barbara contributes $5,500 to a Roth IRA. Although Barbara receives no tax deduction, this IRA can grow to any amount and it could never again be subject to tax. And for the rest of Barbara's life, withdrawals may be as large or small as desired, provided Barbara is at least 59 1/2 years old and she's had the IRA for at least five years.

What about a conversion?

The law also allows you to convert an existing IRA to a Roth IRA. If you convert to a Roth IRA, you'll have to pay regular income tax on your existing IRA. But once you pay the tax, your rollover Roth IRA will offer the benefits of a Roth IRA.

Fortunately, the conversion lends itself to a checklist approach. The checklist below is designed to give you a start in dealing with the conversion question, but it's not intended to be the last word.

Do you currently have an IRA? Yes______ No______

Use this checklist to help you decide if you should convert to a Roth:

Do you expect to be in a higher tax bracket when you retire? Yes______ No______

If you expect to be in the same or lower tax bracket when you retire, it may not make sense to pay the conversion tax today.

Will you be able to pay the resulting income tax with cash from outside your IRA? Yes______ No______

If you must tap into your IRA to pay the tax, conversion to a Roth IRA is unlikely to pencil out. But remember: you can reduce the potential tax bill by making a partial conversion.

Will you be able to leave the money in the rollover Roth IRA for at least five years? Yes______ No______

You could incur tax and a penalty if you tap your Roth IRA in less than five years.

If you checked "Yes" to all questions, you might be a good candidate for a rollover Roth IRA. However, even if the checklist indicates that you should convert to a Roth IRA, your personal situation may still point in the opposite direction.

Before you make a final decision - yes or no - be sure to contact an expert for investment and tax advise. Should you wish additional information please call.

Covering the bases on basis

Basis is a common IRS term, but probably does not enter into your everyday conversation. This IRS term is important because it impacts the taxes you pay when you sell, exchange or give away property.

What basis is

The IRS describes basis as:

The amount of your capital investment in a property for tax purposes. Use your basis to figure depreciation, amortization, depletion, casualty losses, and any gain or loss on the sale, exchange or other disposition of the property.

In plain language, basis is the cost of your property as defined by the tax code.

There are a few different types of basis that apply to different situations, including "cost basis," "adjusted basis," and "basis other than cost."

Types of basis

Cost basis. Your basis usually starts with what the item cost. Cost basis also includes sales tax paid, freight, installation, testing, legal fees and other fees to purchase the property. If you acquire a business you must often allocate the purchase price to each of the assets to establish their basis.

Tip: Retain records of any major transaction. Ensure the documentation includes all allowable costs that could be applied to your basis. This will help reduce taxes when you sell or dispose of the property.

Adjusted basis. When you sell, exchange or dispose of property you may have to adjust its basis to account for changes to the property since you acquired it. This is known as its adjusted basis. A common example of adjusted basis is when you add the costs of capital improvements to property that have a useful life for more than one year.

Adjusted basis can decrease the value of property as well. This is the case when property is affected by things such as casualty or theft losses, depreciation and other deductions.

Home tax tip: Adjusted basis applies to many home improvements. These could include a full roof replacement, adding a room to your home, or even special assessments for local improvements. Create a folder and retain all documentation that could add to your home’s basis. It may lower your capital gain when you sell your home.

Basis other than cost. What is the basis when you inherit property, receive property for services or receive property as a gift? In most cases, the basis is the fair market value of the item. This is the price a willing buyer would pay for the item and a willing seller would be willing to receive for that item. But there are also special basis rules for:

Inherited property

Like-kind exchange of property

Involuntary conversions

Property transferred to a spouse

Should any of these situations apply to you, please ask for a review of your circumstances, as establishing basis can become fairly complex.

Understanding the taxable gain exclusion on home sales

If you're considering selling your home or have recently sold your home, there are possible tax consequences. The good news: much of the gain on the sale of your home may be tax exempt. Here's what you need to know:

Captial Gain Home Sale Exclusion

You can generally exclude $250,000 of any gain on the sale of your main home, or $500,000 if you are a married joint filer. To qualify, the property must be your main home and you must have lived in it for two of the past five years prior to the sale of your property.

More than one home. If you own more than one home, your main home is the one you live in most of the time.

Limits. You may not take the gain exclusion if you used the exclusion on another home in the two years prior to the sale of your current property.

No deduction on a loss. If you sold your home at a loss, in most cases there is no tax benefit available through a deduction.

Tips to Make the Gain Exclusion Work for You

Know the timing. If you have used the gain exclusion in the past, be very careful that the timing of the sale of your current home meets the two-of-five-years rule. Making a mistake here could cost you a lot in additional tax.

Two homes? Plan your residency. If you have two properties, plan your living arrangements to ensure the property you'll sell qualifies as your main home. Keep mail, driver's license, tax returns, bank account statements and other records that show your address to provide evidence to prove your main residence.

Marriage and divorce. If you have a substantial gain and you are planning on getting married or divorced, you may need to carefully plan the timing of the sale of your primary residence to maximize the use of the $500,000 exclusion available to married joint filers.

Keep track of improvements. The longer you live in a home, the more likely you will have a gain when you sell it. Remember that the cost basis of your home can be increased by spending on home improvements, which could reduce your gains. Develop a system to keep track of the money spent to improve your residence.

State tax authorities becoming very aggressive when you move

Suppose you retire to a new state with warm weather and lower taxes. If you keep a part-time home in your original state or you later decide to return, you could have a tax problem. State tax authorities may argue you never really left, and that you owe them a big tax bill for all the income you earned while away. Here are tips to ensure this does not happen to you.

Understand "domicile"

Tax residency is usually based on the concept of "domicile." You may have many homes, but you can only have one domicile. A domicile is the place you intend to be your permanent home, and where you intend to return after being away. When these cases go to court, they are often decided by determining a person's intentions regarding their domicile. Consider this hypothetical example:

Illinois resident Steve Seeyoulater moved to an apartment to pursue a lucrative job opportunity in Indianapolis, leaving his wife and children behind in Chicago. Steve reasoned that since he spent more than 70 percent of his time in Indiana, he could file his state return there and take advantage of its lower tax rate. The state of Illinois could easily disagree with Steve's assumption, since on the surface Steve intends for his permanent home to remain where his family is, in Illinois.

Know the rules before you move

Before moving, research the residency rules in your home and destination states. They often vary from state to state. Some states have specific guidelines on the number of days its residents must be in the state. Others are less exact.

Keep good records

If you say you are in a state for a certain period of time, be ready to support your claim. If during an audit your credit card receipts conflict with where you claimed to be at the time, you will have problems.

Demonstrate your intentions

If you're going to file as a resident of a new state but also have a potential tax claim in another state, you have to be able to demonstrate your sincere intent to change your domicile. Here are some things you can do:

Change your driver's license to reflect your new home.

Register to vote in your new state.

Relocate your checking and savings accounts to a local bank.

Use local service providers. Start going to a new, locally based doctor, dentist and church.

Make sure as many things "near and dear" to your heart are located in the new state. These can include your loved ones, pets or favorite personal items.

Spend the required amount of time in your new home, according to the state's tax laws.

The last thing you want is a call from a state auditor looking for income tax. By being prepared, you can greatly reduce the risk of a surprising tax bill. Reach out if you'd like to discuss your unique situation.

There are new tax filing deadlines effective for 2016 tax returns and beyond. Here are the major changes worth noting.

Small Business Partnership and Limited Liability Corps

Small businesses that are organized as a partnership or limited liability companies filing Form 1065 must file their tax return on or before March 15 of the following year. This moves the required filing date up one month versus last year.

Who: Partnerships and LLC’s taxed on Form 1065

New filing deadline: March 15th (old filing Date was April 15th)

Calendar year C-Corporations

Year-end C Corporation tax filing date is a month later. The old filing date of March 15th is now moved to April 15th.

Who: Year-end C Corporations

New filing deadline: April 15th (old filing date was March 15th)

Note: If your C Corporation is a non-calendar year filer, your deadlines may change over the next few years so please be alert to this.

Foreign bank accounts

Foreign bank account reporting dates are changing. Annual reporting of foreign bank accounts moves from June 30 to April 15th. This is FBAR Form 114

Who: Anyone with foreign financial accounts.

New filing deadline: April 15th (old filing date was June 30th)

As some point you will be responsible for your own money. If that is not currently the case for you, here are some ideas to help get your financial plan in order.

Retirement fund. Saving for retirement is crucial. Even small amounts can go towards U.S. savings bonds or mutual funds with an automatic savings plan. If you have more money to work with, diversify your holdings among several types of investments. The younger you are, the more you should consider growth investments, which are likely to increase your nest egg in excess of the inflation rate. True, your strategy may change over time, depending on your age, total assets, tax bracket, and tolerance for risk. But you should never totally stop investing for growth.

Disability insurance. Of course, picking winning investments isn't the only goal of good financial planning. Adequate insurance is also essential. For example, disability is far more common among middle-aged people than death, yet disability insurance is often overlooked. Consider supplementing any employer's coverage with your own policy. Most people aim to replace 60%-80% of pretax income, since disability payouts are generally tax-free. A disability policy should cover partial disability as well as total disability. You should be able to save money on premiums by opting for a longer waiting period before receiving benefits.

Life insurance. If you have dependents, you need enough life insurance to protect them. This is true even if you're a married stay-at-home mom, if your absence as caregiver would create financial hardship for your family.

Estate plan. Finally, prepare an estate plan that meets your needs. Review it with your accountant and your attorney every few years to ensure that you stay current with the tax law and with changes in your personal circumstances.

Whether you find yourself as a single parent or a widower, you may need to step up your financial understanding. Why not start the process now?

You’ve got it all planned out. Your retirement savings plans are full, you have started receiving Social Security benefits, and your Pension is ready to go. Everything is planned, what could go wrong? Here are five surprises that can turn your plan on a dime.

1. Health emergency and long-term care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement plan to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.

Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.

2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.

Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.

3. Your pension plan. Understand if your pension is in good financial health. Often pensions will offer a lump-sum payout option for you. Should you take it?

Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.

4. Minimum Required Distribution (RMD). Forgot to take your minimum required distribution from your retirement plans this year? The tax bite could be quite a surprise as the penalty on the amount not withdrawn is 50 percent!

Tip: Select a memorable date (like your birthday) to review your RMD and take action so this tax surprise does not impact you.

5. Future Tax Rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.

Tips:

Create a retirement plan with higher state and federal tax rates

Plan for increases in health care costs through Medicare

Plan for more tax on Social Security benefits

Plan for higher capital gain and dividend tax rates

While there are many tax-advantaged retirement savings plans, the various options and rules can make the most sophisticated of us cringe. One of the things to consider is whether you can continue funding your retirement account after you reach the age of 70 ½ (6 calendar months after you reach your 70th birthday). Here is what you need to know if you wish to have this option.

The Basics: the 70 ½ age-based limit

A number of retirement accounts no longer allow you to contribute funds after you reach age 70 ½ or older. Many of these same accounts also trigger Required Minimum Distributions (RMD) rules after this age 70 ½ date. So not only must you stop contributing funds into your retirement account, you must also withdraw some of it and pay income tax on the withdrawal. This is true with 401(k) accounts after retirement and traditional IRA accounts. The RMD rules aside, here are some options for you should you wish to continue making retirement plan contributions.

Some Options

Look into Roth accounts. Roth IRAs and Roth 401(k) accounts allow you to continue making contributions after 70 ½. In fact you can continue to contribute into these accounts for as long as you have income. However, there are differences. Roth IRA’s have income limitations and are not subject to RMD rules. In the case of a Roth 401(k), you can contribute as long as you are working and are a participant in your employer’s plan, but you are subject to RMD regulations. While contributions must be made with after-tax earnings, your marginal tax rate is probably lower once you reach retirement age.

The SIMPLE IRA option. There is not an age limit for contributions into this type of small business IRA account. So if you plan to continue to build your retirement nest egg after reaching age 70 ½, look into this type of retirement plan. An added bonus in this retirement account is that continued participation also includes receiving any employer match funding. The downside is that this plan requires annual distributions after reaching the 70 ½ year old age limit.

Contributions while still working. If you work for an employer after retirement age you can continue to participate in employer sponsored plans. So if you are looking to supplement your income after age 70 and your employer offers a 401(k) or similar program you can continue to participate no matter your age as long as you are employed and are active within the plan.

The rules around retirement plan contributions and distributions are complex. Not the least of which are rules placing limits on 5 percent or greater owners of small businesses. Should you wish to explore your contribution options, please ask for assistance prior to taking action.

Retirement Planning

If you're age 35 or more and haven't made a serious effort to plan for retirement, your dreams of a comfortable and active retirement could turn into the nightmare of being old and poor.

Scare tactics, you say? Consider this: most experts say you need at least 66% of pre-retirement income to live comfortably when you retire. But an active retiree may need 70-80% of pre-retirement income to pay for added travel and health care costs.

Will your company pension and social security replace 60-80% of your salary?

Social security

The portion of your earnings that can be replaced by social security falls dramatically as you climb the income scale. Even if you qualify for the maximum social security benefit, you will probably require additional retirement income from other sources.

Your pension plan

Will your company pension make up the difference? That depends on the plan, your length of service, and your earnings. Many companies are trying to scale back their retirement plans. And if you've changed jobs often, you will have decreased the length of service credited to your pension.

What about inflation?

The impact of inflation will also be a factor in whether you can retire comfortably. If inflation outpaces the cost-of-living increases for social security and your company pension, your plans to live comfortably from these sources may need to be changed dramatically. And if you have a short-fall in your retirement income to begin with, the effects of inflation will be magnified. Assuming inflation at a modest 4% annually, prices will double every 20 years.

How much is enough?

If the prospect of living your remaining years on a steadily declining income doesn't fit your plans, take stock of your situation now. Then take action to establish a program that will lead to a comfortable retirement.

First, do an estimate of how much income you will have at retirement and an estimate of how much you will need for the kind of retirement you have in mind. For a quick estimate of whether or not you'll have enough income for retirement, calculate the following:

1. Yearly income needed at retirement in current dollars (70%-80% of current gross income): $

2. Expected social security benefits: $

3. Expected retirement benefits (IRA, Keogh, 401(k), company plans, etc., currently in place): $

4. Annual investment income needed (line 1 minus lines 2 and 3): If your current savings will provide this amount, you are in good shape. If not, read on. $

How to come up with more

If you won't have enough, the next step is to see how you can come up with the extra income. Your choices will probably be limited to some combination of the following:

Save more (reduce current spending).

Increase the return on the savings you already have.

Postpone retirement.

Plan to supplement your retirement income with part-time work.

Accept a lower standard of living when you retire.

The younger you are, the more of your retirement income you can fund through a savings plan. If you're age 30 and start saving 10% of your yearly income today, you'll probably reach retirement with a comfortable nest egg. If you don't get started until age 40, you may need to save 20% of your income.

Maximize your earnings

When deciding on a savings plan, you will want to maximize your earnings. Look first at tax-deferred savings, particularly if your employer offers a 401(k) plan. If you don't have a 401(k) available, you can still get tax-deferred earnings through an IRA, long-term growth stocks, insurance annuities, real estate investments, and Series EE bonds.

To earn more on your savings, consider investing in equity investments (stocks and real estate) rather than fixed-income investments (CDs, bonds, savings accounts). If you're ten years or more from retirement, you may want to put more of your money in equities. As you near retirement, it may be appropriate to switch more of your funds to fixed-income investments.

Start planning now

Regardless of where you decide to invest, the single most important step to a comfortable retirement is to start planning and saving today.

When it comes to taxes, growing older can have its advantages. But older individuals may also have additional tax-related requirements. Here's a quick overview of the tax and financial breaks available as you reach a certain age.

Higher standard deductions. You're eligible for a higher standard deduction once you reach age 65.

Tax credit for the elderly. You may qualify for this direct credit against taxes if you're age 65 or older during the tax year. There are limitations if your tax-free pension benefits, such as social security, exceed certain levels. Income limitations also apply.

Tax breaks for social security benefits. Generally, you'll pay no tax on social security benefits if the total of one-half of the benefits plus all other income is less than $25,000 (singles) or $32,000 (married filers). Above those levels, you'll pay tax on up to 50% of your benefits. High-income seniors could be taxed on up to 85% of their social security benefits.

Higher return filing threshold. Because of the higher standard deductions and potentially tax-free social security benefits, your taxable income may not reach the filing threshold and you may not need to file a federal income tax return. You may need to file for other reasons, though.

Higher contributions. Once you reach age 50, you may contribute more to your retirement accounts. Also, at age 55, you can contribute an extra amount to a health savings account.

Reverse mortgage. If you're at least 62 years old and own your own home, you can use a reverse mortgage to convert your home into nontaxable income. With a reverse mortgage, the lender makes loan advances to you which don't have to be repaid until your death. Repayment of the loan and accrued interest would also come due if you sell the house or move, but you won't have to repay more than your home is worth.

Home sales. You may plan to sell your home if you move or want to downsize in retirement. Couples who file a joint tax return can keep up to $500,000 of the profit on a home sale tax-free ($250,000 for singles).

Retirement Distribution Rules

Do you own a traditional IRA, SEP-IRA, SIMPLE IRA, Keogh plan, 401(k) plan, or 403(b) plan? If so, you'll have to start taking distributions when you reach age 70½. If you don't, you'll forfeit 50 percent of the amount you should have taken but did not.

The RMD rules apply to the plans mentioned above, but not to Roth IRAs.

Here are the requirements.

You may take your first distribution any time before April 1 of the year following the year in which you reached age 70½. However, a first distribution taken after the year you turned 70½ still will be credited to the year you actually reached the required age. You'll then have to take another distribution by December 31 of the current year, forcing you to pay income tax on two distributions in the same year.

You must take each subsequent distribution by December 31 of the applicable year. To avoid the 50% penalty, give your plan administrator enough time to process the distribution and get it to you by year-end.

The amount of your RMD is computed using Uniform Lifetime Tables issued by the IRS. These tables provide percentages that are applied to the value of your retirement account as of December 31 of the year preceding your distribution.

If you're still employed at age 70½, you may be able to delay withdrawing from your current employer's plan until you actually retire.

You and your spouse may not take distributions from one another's accounts to make up your RMDs. However, if you individually own more than one IRA, you may compute a combined RMD and withdraw it from one or any combination of the accounts. RMDs from non-IRA plans, such as Keogh or 401(k) plans, must be computed for and withdrawn from each separate account.

You may take distributions in monthly, quarterly, semi-annual, annual, or irregular increments, as long as you reach your required total each year.

Since RMDs are taxable, consider making quarterly income tax estimates to cover your liability, or instruct your administrator to withhold taxes from each distribution.

Financial institutions must either inform retirement account owners about their required distribution amount, or they must offer to calculate it upon the owner's request. Banks, brokers, and other custodians must also inform individuals about the deadline for taking their minimum withdrawals.

Financial institutions must report your name to the IRS if you're required to take a distribution. This will alert the IRS if a distribution fails to show up on your tax return.

Complexity remains

Current rules make calculating your distributions simpler, but retirement plan rules remain complex, and they differ for each type of retirement plan.

Solo 401(k) plans

Many business owners have considered 401(k) plans to be retirement plans for large companies. Though there is no requirement to have a certain number of employees in order to establish a 401(k) plan, the high costs of setting up and administering a 401(k) have made these plans unappealing to small businesses. Now, one-person businesses are discovering that 401(k) plans are worth another look.

How does a 401(k) plan for a one-person business differ from a 401(k) plan for a large company? Unlike a traditional 401(k), these plans are designed specifically for one-owner businesses where the owner is also the only employee. They are referred to by various names: uni-401(k), one-man 401(k), mini-401(k), and solo 401(k) plans. Administratively, these plans are less complex, less burdensome, and less costly to manage than traditional 401(k)s.

What makes solo 401(k) plans simpler? Because a solo 401(k) covers only one person - the business owner who is also the only employee - the complex 401(k) rules on coverage and nondiscrimination do not come into play.

Are lower costs and simpler administration the main benefits of a solo 401(k) plan? No. Depending on your earnings, you may be able to contribute more to a 401(k) than to another plan. Larger contributions may be possible because both the owner-employee and the company can make contributions for the benefit of the business owner. Since they allow higher contributions than other plans, such as SIMPLEs and SEPs, 401(k)s give you more opportunity to cut your taxes while building a bigger retirement nest egg.

How much can an individual put into a solo 401(k) plan? You can elect to contribute up to 100 percent of your earnings to the plan, subject to a specified annual limit. If you're 50 or older, you're allowed to make additional "catch-up" contributions.

Are these contributions tax-deductible?These contributions are actually called "elective deferrals," and they are excluded from your taxable income rather than being deducted from it. Your contributions are subject to social security tax, but they will not be subject to income tax until you withdraw money from the account.

What can the business contribute to the plan? Your business can make tax-deductible contributions to your account ? up to 25 percent of your wages, or 20 percent of net self-employment earnings. There is an overall dollar limit for the combined contributions you and the business can make each year.

Does the business have to be a corporation in order to have a 401(k) plan? No. Both incorporated and unincorporated businesses can set up a solo 401(k) plan. Even if you're self-employed, you're still considered an employee of the business.

Can you borrow from a solo 401(k)? Yes. That's another benefit to an individual 401(k); you have access to the money you've invested. While borrowing against SEPs or SIMPLEs is never allowed, 401(k) plans allow you to borrow as much as 50% of the balance in your account, up to $50,000.

If you have retirement money in other plans, can it be rolled over into your solo 401(k) plan? Yes, you have the option of rolling over money from other eligible retirement accounts into your 401(k) account. Doing so may make it easier for you to track investment returns.

Are there any disadvantages to a solo 401(k) plan? Yes. Perhaps the main problem is that if your business grows and you hire employees, your 401(k) plan must also cover them. Your plan then is subject to all the complex rules and costly administration of a regular 401(k) plan. Because nondiscrimination rules would no longer allow you to make large contributions just for yourself, the main benefit of having a solo 401(k) would be lost. In certain situations, a solo 401(k) plan is an excellent way to cut current income taxes while putting away large amounts for a business owner's retirement. Before making any decisions, investigate not only a solo 401(k) but also other retirement plan options available to you.

The Social Security Administration announced a 1.3 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2021. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2020.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.1 percent this year, to $142,800 (up from $137,700 in 2020). A recap of the key amounts is outlined here:

What does it mean for you?

Up to $142,800 in wages will be subject to Social Security taxes, up $5,100 from 2020. This amounts to $8,853.60 ($8,537.40 in 2020) in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.

For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,543 per month in 2021 – an average increase of $20 per month.

SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).

A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2020 to 2021.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Tips to avoid IRS penalties on 401(k) retirement plan distributions

While each retirement plan has similar early withdrawal penalty exemptions, they are not all alike. Knowing these subtle differences within 401(k) plans can help you avoid a 10 percent tax penalty if you take money out of the plan prior to reaching age 59 1/2. This is true because a basic rollover of funds into a Traditional IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:

Using Retirement Funds for Qualified Higher Education Expenses. Want to use retirement funds to pay for college? Make sure you pull the funds out of an IRA and not another retirement account type or you could be subject to an additional 10 percent early withdrawal penalty. After rolling the funds into an IRA, the funds can be used penalty-free as long as they are for qualified educational expenses at a qualified school.

Using Retirement Funds to Buy, Build, or Rebuild a First Home. You may use up to $10,000 of your IRA per person to purchase a first home and avoid paying the 10 percent early withdrawal penalty. If these same funds are pulled out of a 401(k) plan you could be subject to an additional federal tax of up to $1,000. Roll the funds to a Traditional IRA first, and save the tax.

Using Retirement Funds to Pay for Medical Insurance. There is also a provision for an unemployed individual to use IRA funds to pay for medical insurance. This provision does not exist in 401(k)s, so to avoid the early withdrawal penalties, roll the money from your 401(k) into an IRA prior to using the funds to pay for your insurance premiums.

Remember, by rolling the funds prior to pulling the funds for pre-retirement distribution you are avoiding the early withdrawal penalties, but you must still pay the applicable income tax.

Bonus Retirement Plan Tips.

Two other quirks in the retirement tax code to be aware of;

Early Distributions From a SIMPLE IRA Could Trigger a 25 Percent Penalty. The early distribution penalty of 10 percent increases to 25 percent for those in SIMPLE IRAs, if the withdrawal occurs during a two-year time period starting from your initial enrollment date in the SIMPLE plan. You may not roll your funds into another retirement plan type during this two year period to try to avoid the increased early withdrawal penalty.

Minimum Distributions are Required From ROTH 401(k)s but Not ROTH IRAs. In an unusual quirk in the tax code, if you have a ROTH 401(k) you are required to make minimum required distributions from this account like other 401(k)s and IRAs when you reach age 70 1/2. If, however, you roll the ROTH 401(k) funds into a ROTH IRA you are no longer subject to the minimum distribution rule requirements.

What you need to know

We're always being reminded to save for retirement in tax-advantaged accounts like 401(k)s or IRAs. But did you know the government does an about-face and forces us to take money out of those accounts once we reach retirement? It's called the required minimum distribution (RMD) rule. Here are some tips you should know about RMDs well before you reach retirement age.

RMD penalties are high. RMD rules require you to withdraw a certain amount of money every year from tax-deferred retirement plans like 401(k)s and traditional IRAs after you reach age 70½. These withdrawals are then taxed as ordinary income. If you don't follow the rules, the IRS can assess a penalty equal to 50 percent of the amount that should have been withdrawn, on top of the regular tax due.

Start thinking about RMDs early. One of the biggest mistakes retirees make is waiting until age 70½ to start thinking about RMDs. Remember, you can start withdrawing funds without penalty after you reach age 59½. If you start planning a tax-efficient withdrawal strategy before RMD rules kick in, you can manage what tax rate will be applied to your retirement distributions. With careful planning, smart taxpayers can easily reduce the federal tax rate they pay on their retirement distributions by 5 percent or more.

The ½ year start date is confusing. You don't have to start taking RMDs until April 1 of the year after you turn 70½. For example, if you turned 70½ on July 15, 2018, you wouldn't have to take your first RMD until April 1, 2019. However, after that first year, RMDs will be due by Dec. 31 on every year afterward (including on Dec. 31, 2019 in this example).

RMD amounts are based on complex tables. How much you're required to withdraw is based in part on the average life expectancy of someone your age. A calculation based on complex IRS life expectancy tables, plus your retirement account balance in the prior tax year, is used to determine your RMD. The good news is that the financial institution handling your retirement account will usually do the calculation for you.

There are exceptions to distributions if you still work. If you reach 70½ and you’re still working for an employer providing you with a 401(k), you usually don't have to take an RMD from that account as long as you don't own 5 percent or more of the company. However, you still must take RMDs from other plans where you have assets.

Not all accounts require distributions. Remember, not all retirement accounts require you to take an RMD. Roth accounts, for example, are exempt from RMDs and give you some extra flexibility to manage your other taxable withdrawals during retirement.

RMD rules can be confusing and are a good example of why tax planning is such an important component of a retirement strategy.

The Social Security Administration announced a 1.6 percent boost to monthly Social Security and Supplemental Security Income (SSI) benefits for 2020. The increase is based on the rise in the Consumer Price Index over the past 12 months ending in September 2019.

For those still contributing to Social Security through wages, the potential maximum income subject to Social Security tax increases 3.6 percent this year, to $137,700. A recap of the key amounts is outlined here:

What does it mean for you?

Up to $137,700 in wages will be subject to Social Security taxes, up $4,800 from 2019. This amounts to $8,537.40 in maximum annual employee Social Security payments. Any excess amounts paid due to having multiple employers can be returned to you via a credit on your tax return.

For all retired workers receiving Social Security retirement benefits the estimated average monthly benefit will be $1,503 per month in 2020 – an average increase of $24 per month.

SSI is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).

A full-time student who is blind or disabled can still receive SSI benefits as long as earned income does not exceed the monthly and annual student exclusion amounts listed above.

Social Security & Medicare Rates

The Social Security and Medicare tax rates do not change from 2019 to 2020.

Note: The above tax rates are a combination of 6.20 percent Social Security and 1.45 percent for Medicare. There is also 0.9 percent Medicare wages surtax for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please note that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

What every Traditional IRA owner should know

It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:

Medical insurance premiums if unemployed. If you receive federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.

Qualified higher education expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.

Medical expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 7.5% of your adjusted gross income you may do so penalty-free.

First-time home buyer. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. To qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.

Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.

You're the beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.

Qualified reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.

Annuity distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life expectancy." This option is complicated and must use an IRS-approved distribution method to qualify.

Some Final Thoughts

Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.

While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.

While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.

Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.

Traditional IRA

A Traditional IRA is an individual savings account that allows you to contribute money for your retirement. Depending on your income level, you may deduct the contributions from your taxable income. Any earnings made in a Traditional IRA account remain tax-deferred until the money is withdrawn from the account. Tax is only paid on the money once it is withdrawn. After the account holder reaches age 70 1/2 you may no longer make contributions into your Traditional IRA and minimum required distributions must be taken from the account each year. Anyone with earned income can create a Traditional IRA, but if you also have a retirement account with an employer, there are income limits to the amount you can contribute to your IRA in pre-tax dollars.

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute income that has already been taxed ("after-tax" dollars). Withdrawals of earnings on contributions from Roth IRA accounts are federal income tax-free so long as a 5-year holding period has been met and the account holder is at least 59 1/2 years old, disabled, or deceased. Withdrawals of contributions are always tax-free since you already paid the tax on the contributions. There are no required minimum distributions nor are there age limits for contributions.

Traditional IRA contributions that qualify for pre-tax treatment will allow a larger beginning investment to compound over time versus a Roth IRA.

Roth IRA contributions, though smaller because of tax treatment, could create earnings that are never taxed.

Roth IRA accounts have more flexible contribution and withdrawal rules.

So the answer is. . .it all depends. If you think tax rates will be significantly higher when you withdraw your retirement savings, then think seriously about a Roth IRA.

If you think your retirement account investments will perform well, then perhaps the earnings growth in a Traditional IRA will more than pay for the additional tax at time of withdrawal.

OR run the risk of a high tax bill

“Before taking action talk to your tax adviser.”

How many times have you seen this legal disclaimer and have your eyes gloss over? Unfortunately, there are too many times when taxpayers do not follow this advice and then must pay the price with an unnecessarily high tax bill.

Here are some of the most common situations that can save you money by seeking advice before you act.

Getting married

Selling a home

Donating stocks and investments

Getting divorced

Change in dependent status

Approaching retirement

Starting a business

Managing participation in tax-advantaged retirement accounts like 401(k), 403(b), and various IRAs

Death and birth of loved ones

Donating high value items

Selling stocks, bonds, mutual funds or business property (rentals)

An audit

Tax efficient transfer of your estate

Selling or buying high value assets (art, collectibles, real estate, and small business assets)

Determining Social Security benefit strategy

In advance of any of these events, or when in doubt, please ask for assistance. There are too many stories that include the words “if only he had talked to someone first.”

Are you planning to use your vacation home soon? If you're not going to use it, have you considered renting it? Or are you thinking of buying a vacation home? Vacation homes, with proper tax planning, can help create tax benefits.

Some types of qualifying vacation or "second homes" which might have escaped your notice are boats, motor homes, timeshares, and trailers. Three simple tests must be met to have a second home: each must have sleeping, cooking, and toilet facilities. If your camper has these facilities, you have a second home for tax purposes.

Owners of vacation homes face a set of tricky tax rules. How these apply to you depends on your personal and rental use of the home during the year. Here are the general rules:

100 percent personal use. If you never rent out your vacation home, you can generally deduct mortgage interest and property taxes. Or, if you rent it out for 14 days or less, the rental use is disregarded. The rental income is tax-free and any expenses related to the rental period are nondeductible.

100 percent rental use. If the home is rented without personal use, it's treated as rental property. (Personal use means use by your family or anyone who doesn't pay full market rent.) With rental property, you can deduct interest, taxes, operating expenses (utilities, maintenance, etc.), and depreciation. However, your current loss deduction may be limited by the passive loss rules.

Mixed personal and rental use. If there are more than 14 rental days and personal use doesn't exceed the greater of (1) 14 days, or (2) 10 percent of rental days, you have a rental property. This can be bad news. Interest and taxes must be allocated between rental and personal use. If there is a rental loss, it may not be currently deductible because of the passive loss rules, and the interest allocable to the personal use part of the year is not deductible. If personal use exceeds the greater of 14 days or 10 percent of rental days, special vacation home rules apply. You can generally deduct interest and taxes. The rental income is reduced by allocable interest and taxes. Remaining rental income can be offset but not exceeded by operating expenses and depreciation. Disallowed rental expenses are carried forward to future years.

Optimize your tax benefits. Although they're complicated, the vacation home rules present a place where you can easily make adjustments to optimize your tax benefits. Sometimes it's better to use the home more often, sometimes less often.

Unfortunately, there are few rules of thumb in this complex area. You need to review the rules as they apply to your specific situation.

Tax filing time is an ideal time to review your financial affairs. You have to gather information to prepare your tax return at this time. Why not take one more step and do something positive for your financial well-being?

The following suggestions will get you started on your financial review:

Hold a discussion with your family. Spouses and children need to share and prioritize their financial aspirations.

Write down your financial goals. How much money will you need to meet each goal? When will you need the money, and how will you get it?

Construct a net worth statement (a list of your assets and debts), and compare it to last year's statement. Are you gaining or losing ground?

With your goals (and the effects of inflation) in mind, review the performance of your investments.

Take steps to protect what you already have. Goals may become instantly unobtainable if you lose your present assets or your income potential.

Do you have adequate disability insurance coverage to replace take-home pay if you become incapacitated?

Do you have enough life insurance if you or your spouse should die?

Do you have replacement value property insurance on your home?

Do you have adequate insurance for calamities such as automobile accidents or lawsuits? Note: Make sure that you need all of the insurance that you have. Do not duplicate employer-provided coverage. Review your coverage annually; do not just automatically renew policies.

Review your will and your estate plan. Did your situation change during the year (marriage, divorce, births, deaths, move to another state, for example)? If so, make appropriate changes to your will and estate plan.

Review your credit use. Keep your credit card bills current. If you're finding that hard to do, it's probably time to cut up some of those credit cards and get your debt under control.

Organize your records. If you had trouble assembling data for your financial review, you need a better system. Set one up.

Sandwich Generation - Financial Tips

The "baby boomers," Americans born between 1946 and 1966, are moving like a wave into their fifties and sixties. Unfortunately, many of them are facing new financial pressures. Their kids are likely to need help paying for increasingly expensive colleges. Their folks are getting older and living longer. Boomers are digging into their wallets to make up the shortfall in their parents' retirement income, and many are trying to help cover the costs of long-term care. On top of that, they're struggling to save for retirement and pay for the groceries. No wonder they feel squeezed.

If you're part of the "sandwich generation," take heart. Careful planning and a little diligence can help to alleviate some of this pressure.

First, you need to identify your priorities. How important to you are such things as setting aside funds for retirement, paying for your kids' schooling, and helping your parents with the cost of long-term care? Once you've identified your priorities, you can set realistic goals to address them, putting the bulk of your financial resources and energy toward meeting the most important goals first.

Retirement. Many people would like to retire at a relatively young age. But some may have to rethink that goal in light of other financial demands like college tuition and care for elderly parents. Working longer can have distinct benefits. Besides funding an accustomed lifestyle for a few more years, working longer and leaving your retirement accounts intact will give the funds more time to grow.

Education. Many families want to help finance the education of their children. Tuition, books, and other college costs can eat up tens of thousands of dollars. If your child is still young, it's a good idea to start saving early and invest for growth. If your child is ready to start college but isn't financially prepared, you might consider letting him or her finance a portion of the cost by working or obtaining loans. College-age kids have their working lives ahead of them. Their income, including their ability to repay loans, should increase.

Parents. For many in the sandwich generation, helping to pay for the high cost of a parent's long-term care is a priority. For example, a year in a nursing home can cost $30,000 to $50,000. At some point, your parents may need financial help to cope with such high expenses. In the meantime, you may be able to help them manage their finances and consider options such as long-term care insurance. You might want to meet with their banker, lawyer, and accountant to look over your parents' financial status and review legal papers, including such documents as power of attorney, wills, and trusts.

Feeling squeezed? Call if you wish a review of your situation.

Often if you are in dire need for money the most tempting area to look is your IRA, 401(k), and other qualified retirement accounts. These funds, set aside for your retirement, may seem to be the answer to your financial woes. But is it a good idea to tap into these funds prior to reaching age 59 1/2?

Things to consider

Retirement funds taken out for non-qualified use are not only subject to regular income tax, but are also subject to a 10 percent early withdrawal penalty.

Debt collectors are commonly prohibited from access to your retirement accounts. So if you are using the funds to put off debt collectors, be aware that you may be using funds that might be protected if you became insolvent.

There is also an opportunity cost. Currently the funds in your traditional IRA , 401(k), and similar retirement plans grow tax deferred. So a dollar today will compound until you withdraw the funds at retirement. This growth is lost with early withdrawals.

It is usually not a good idea to use early withdrawals to help pay a child’s debt or school costs. There are better ways to help children financially than to pay the stiff penalty on your early withdrawal.

If you still need to make the early withdrawal

Withdraw "after-tax" contributions first. This can be Roth IRA contributions or other after-tax contributions. Why? Since these funds have already been taxed, there is often no additional tax burden or early withdrawal penalty.

Certain withdrawals from qualified plans are allowed. This includes hardship withdrawals for qualified medical expenses, qualified educational expenses, and up to $10,000 to purchase a first time home.

Consider taking out a loan from your employer-provided 401(k). You will then repay this loan to your retirement account with interest. But be careful, you are required to repay any outstanding balance when you leave your job.

Look into taking the distributions as part of a series of "substantially equal periodic payments over your life expectancy". If done right, this can help avoid the 10% early withdrawal penalty.

While it is never a great idea to tap into funds that are specifically set aside to make your retirement stress-free, if you must do so it is worth being thoughtful about how you go about the withdrawal.

As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education.

The dilemma

With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do?

Retirement prior to education

In most cases it is more important for parents to put their financial needs ahead of their children. Why?

One of the best ways you can help your child in the long-term is to ensure you won’t be a financial burden on them in the future.

Your children can take out education loans, while lending options during retirement years are limited.

There are numerous programs available to your child to help them afford college.

While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.

Some tips to consider

There is plenty of opportunity to fund both retirement and college education in a tax advantaged way. You might wish to consider funding basic retirement needs first, then look at tax advantaged educational savings programs.

Retirement: First fund employer provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children.

Child’s education: Look into Coverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings.

Consider other ways to generate college funds. Here are some ideas;

Start saving for both retirement and college early. Use time to help grow the value in your accounts.

Attend a public versus a private college

Look into work-study alternatives

Review and apply for grants and scholarships

If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school.

Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found.

We have witnessed such volatile activity in the stock market in recent years that the old stock selection rules are not always applicable. Seasoned investors and new investors alike want a sure-fire way to pick the winners.

Well, no one can offer any guarantees, but smart investors do have certain characteristics they associate with a winning stock.

A crucial key is that the stock should meet certain criteria. There are good stocks that don't fit the mold, but historically, the stocks with the biggest gains shared most, if not all, of these features:

Strong balance sheet Look for companies with a low debt-to-equity ratio. In recessionary times, debt-laden companies may not stay afloat.

Low price-to-earnings ratio P/E ratios are usually industry-driven, so make sure you compare similar companies. Low P/E ratio may mean an increased rate of return on your investment.

Good management A strong management team and a leadership position in their industry are earmarks of a good company. Look for a history of steady growth to assess staying power.

Book value A stock priced lower than its book value provides extra assurance that your investment will not go sour.

Good dividends A strong dividend history with regular increases adds to a stock's desirability. A healthy income stream can make the wait for growth returns more pleasant, and it helps prop up a stock's price in a falling market.

Undervalued assets Company assets such as real estate and mineral holdings may be worth dramatically more than the balance sheet and stock price indicate. Companies with undervalued assets may be tempting to conglomerates in these days of merger mania.

Broad ownership base A stock that is held by relatively few investors is much more likely to be subjected to dramatic drops if a major holder decides to bail out.

Basic industries Shy away from faddish industries, notorious for meteoric rise and fall. When timing is the most crucial element in an investment's return, it becomes more akin to gambling than investing.

Strong cash flow Healthy cash flow will help a company weather economic downturns. It might also make the company a takeover target since takeover debt can be paid off with the surplus dollars.

Unusually low price A low price when compared to the stock's average historical price could indicate a bargain if the drop is due to market forces rather than changes in the company.

Though there is no magic way to select winners, the hallmarks of a good stock value are somewhat ascertainable. Good investing requires legwork and attention to detail, but that's a small price to pay for a healthy portfolio.

The Tax Torpedo

When you reach age 70 ½, the trigger requiring distributions from qualified retirement accounts is pulled. This annual Required Minimum Distribution (RMD) applies to Traditional IRAs, SEP IRAs, SIMPLE IRAs, 401(k), 403(b) and other defined contribution plans. Amounts not distributed on a timely basis could be subject to a 50% penalty. Thankfully, the RMD rules do not apply to Roth IRAs.

The RMD rules are established to ensure the deferred tax benefit for certain retirement accounts does not go indefinitely into the future. In other words, the IRS now wants their cut of your tax-deferred savings accounts. The amount you must take out each year is based upon your age, your spouse’s age and your filing status.

The Tax Torpedo

The Tax Torpedo refers to the surprising event of having your Social Security Income taxed. Depending on your income and filing status, up to 85% of your Social Security Benefit could be subject to income tax.

RMD causes Tax Torpedo

If you continue to wait to start taking money out of your retirement accounts, the balance in your accounts may be very high when you reach age 70 ½. These higher balances mean a higher annual withdrawal amount. If your required retirement plan distribution is large enough it may put you into a higher marginal tax bracket as well as trigger taxes on your Social Security.

Some Tips

Plan withdrawals. Once you hit age 59 ½ you may withdraw money from qualified tax-deferred retirement accounts without experiencing an early withdrawal penalty. To reduce the tax risk on your Social Security, manage annual disbursements from your retirement account(s) to be more tax efficient when you reach age 70½.

Starting Social Security. You may begin full Social Security Benefits after you reach your minimum retirement age. However, your benefit amount can increase if you delay your start date up until age 70. Consider this as part of your plan to manage a potential Tax Torpedo.

See an advisor. There are many moving parts in planning for retirement. These include Social Security Benefits, pension plans, savings, and retirement accounts. Ask for help to create the proper plan for you and your family. One element of the plan should include being tax efficient.

Here is a tax planning tip for those who file their tax returns early and wish to contribute to a tax deductible IRA, but do not have the funds to do so.

Say you want to pay into an IRA to get a tax break but you don’t have the money? Take heart, there are ways to get around this. The IRS allows you to take the deduction now and pay later when you get your refund.

How it works

Step 1: Prepare your tax return early in the year (early February). Run the tax return considering an income reducing contribution to a tax deferred IRA. If you do not have the funds to put into the IRA, but your tax return has a refund that can fund your contribution, you are ready for step 2.

Step 2: File your tax return with the IRA contribution noted. File the tax return as early as possible to ensure your refund gets back to you prior to April 15th. E-file the return if at all possible.

Step 3: Fund your IRA prior to April 15th. Tell your IRA investment firm you wish your IRA contribution to be for the prior year.

That’s it. You have now effectively had the income reduction benefit of your IRA contribution help fund the account through your tax refund.

The risks

Timing is everything. If you use this technique it is critical that the IRA is funded on or before April 15th. If it is not, your tax return will need to be amended.

Refund not received in time. If you do not receive your refund in time, you may not have the funds to make a timely IRA deposit. In this case, you may need to borrow funds on a short-term basis until the refund is received.

No extensions. The IRA contribution for the prior year must be made by April 15th of the following year (the original filing due date). This is true even if you file your return under an approved extension period.

While not for everyone, this tax tip could help you fund more of your retirement on a tax deferred basis.

Long-term care insurance has the same tax-favored status as regular health insurance.

In recent years, a number of employers have started to offer long-term care insurance as an optional employee benefit, and most insurance companies offer individual policies.

Insurance typically covers the cost of extended care in a nursing home, or in your own home if you become chronically ill or disabled and unable to care for yourself. The costs of such care over an extended period can be overwhelming and can rapidly wipe out your retirement savings.

Regular health insurance usually doesn't cover prolonged nursing care or home assistance, and Medicare only provides coverage for a few months of nursing care after you have been hospitalized. Medicaid will cover such costs, but only if you've exhausted virtually all of your assets.

The tax breaks

Both the premiums you pay for qualified long-term care insurance and the benefits you receive enjoy favorable tax treatment.

Benefits received under a qualified policy that pays only actual expenses are tax-free. In contrast, part of the benefits from policies that pay a set dollar amount (per diem) may be taxable.

The premiums you pay for long-term care insurance may be deductible as unreimbursed medical expenses if you itemize deductions. There is a limit on the amount of annual premiums you can deduct, depending on your age. Also, it's important to remember that unreimbursed medical expenses are deductible only to the extent that the total exceeds 10% of your adjusted gross income in 2019 and beyond (7.5% in 2018).

If you're self-employed, you may deduct the same percentage of long-term care premiums that applies to regular health insurance premiums.

The need for long-term care insurance

Long-term care insurance is not for everyone. You should consider it if you are not wealthy enough to pay for long-term care as you need it.

You may also want to consider whether your family health history suggests you'll die relatively early or live to old age.

What to look for in a policy

If you decide to buy a policy, determine whether it qualifies for favorable tax treatment, and look carefully at factors such as eligibility for benefits, the types of care it covers, and whether it contains inflation protection.

Some policies offer lifetime coverage while others are for a fixed term. If you choose the latter, look into restrictions on renewability.

In addition, most policies have a form of deductibility, called an "elimination period," which is the number of days before coverage begins. The longer the elimination period, the lower the premium. Match the elimination period to what you can afford, remembering that Medicare may cover your costs for an initial period.

And finally, these policies are not cheap, so take your time and do your homework before you commit.

Couples often enter into marriage without ever having had a serious discussion about financial issues. As a result, they find themselves frequently arguing about money. If you are planning a wedding, here are some steps you can take to get your marriage off to a good financial start.

Premarital financial discussions. You and your intended might enjoy the same movies and the same kinds of food, but are you financially compatible? Take some time to discuss your finances before you tie the knot. Talk about your assets, your debts, your credit ratings, and your financial attitudes, including your spending and saving habits. Do you share the same goals, such as having children, buying a home, or continuing your education? How will you finance your dreams?

How will you handle your finances as a married couple? For example, who will pay the bills? Will you maintain joint or separate checking accounts? If you maintain separate accounts, how will you split your expenses?

Premarital financial counseling. Every couple needs to work out their own style for handling money. Call upon your accountant to assist you in setting up a budget, controlling your taxes, and mapping out a financial plan for your future.

Premarital legal counseling. If you have substantial assets, discuss the merits of a premarital agreement with your attorney. If your partner has substantial debt, ask your attorney how you can protect yourself from his or her creditors.

Perhaps you plan on buying a house together or combining financial accounts. Your attorney can advise you on the best way to hold title to your assets.

Discussing your finances before you say "I do" may increase your chances for living happily ever after.

Estate Plan Documents

You work hard providing for your loved ones during your life. You can also provide for them when you are gone with a simple estate plan that legally conveys your desires to all your heirs. Here's a short list of some of the basic documents you should consider including in your estate plan.

Information memo. Keep a list of your insurance policies, brokerage accounts, businesses you own, outstanding debt, credit cards, tax-related documents, and names and phone numbers of professional advisors in a single place that can be easily accessed. As time passes, review this document and update as necessary.

A will. Your will is a written document that gives your heirs the blueprint of your wishes and intentions. In your will, you may bequeath assets to your heirs, appoint an executor to distribute your assets, and designate a guardian for your minor children.

A durable power of attorney for finances. Designate in this document an individual or advisor to make financial decisions on your behalf if you become incapacitated. The individual can sign checks if necessary and can be given access to your checking and investment accounts.

Medical directives. You name an individual to make health-care decisions for you in the event you become unable to make them yourself.

Funeral instructions. Detail what you feel is best in your specific situation. Include a list of relatives, friends, and business associates to be notified by your immediate heirs.

Taxes. Your estate plan should include provisions to minimize taxes if your estate might be subject to taxes at either the state or federal level.

Building a nest egg to give you a secure financial future doesn't require a degree in economics, just a degree of common sense. The rules are easy and time-tested, and the smart players always abide by them.

1. It's never too late or too early to start. Think back five or ten years and say to yourself, "Where would I be now if I had started saving a little each month back then?"

2. Get out of debt. Payments on certain things such as a home or a car may be necessary, but pay off the charge cards. That alone is a sound investment with a return equal to the interest credit card companies charge you.

3. Establish a budget, a realistic one that accounts for everything, including the big financial drains like taxes, vacations, and holiday spending. While you're drawing up a budget, streamline your finances. Don't buy things that give you nothing in return. Don't splurge; think about what you're buying. Be sure you are properly insured with the right types and amounts of insurance.

4. Set aside an emergency fund, enough to live on for three to six months. Consider building your emergency fund in a low-risk investment that's easily converted to cash, such as a no-load mutual fund or a savings account.

5. Invest safely and simply. Be cautious with your investments until you have built a portfolio and have some knowledge of how the financial world operates. Your first investments might be CDs, mutual funds, or savings bonds.

6. Stick with your plan. Investing a fixed amount every month without fail is far wiser than waiting for a windfall from interest rate changes or a stock market jump. Inform yourself with periodicals, books, and television financial programs. Monitor your plan and gently steer it in a new direction if necessary.

7. Diversify. Remember to diversify even within the broader markets. A mutual fund may provide a range of stocks, but you should diversify further by investing in different types of mutual funds and in different "families."

8. Include your spouse in planning sessions, or your spouse may live a nightmare trying to unravel your financial affairs if something happens to you. Also, input from a spouse gives fresh perspective for establishing realistic financial goals for the entire family.

9. Have patience. You do not create financial security in a few months; you achieve it over many years. Seek professional assistance when you are in unfamiliar territory.

If you want to make a profit by investing in rental real estate, you must be willing to commit more resources to this property than you would to an investment made at your bank, through a broker, or in a mutual fund.

Someone has to collect rents, find good tenants, and maintain the property. If you hire help to do these tasks, your profit shrinks.

Also, if you borrow money to buy the property, you have to pay the mortgage whether or not the property is rented. You should have emergency funds so that you will not lose the property to foreclosure if you lose your tenant.

If you decide to invest in rental property, you may need professional help to match your resources to property that will meet your goals. Some of the questions you should consider before you invest:

What can you afford? Determine the highest price range you can sustain, given your present resources and the projected cash flow from the property.

Is the property fairly priced? Get a list of comparable listings and recent sales from a real estate company. Make any purchase offer contingent on the results of structural and pest inspections. Check local records to verify that additions and major improvements were made in compliance with building codes.

Are there any restrictions on the property? Rent control will lower the price that you can afford to pay for a property.

Who will be your tenants? Evaluate the likelihood of nonpayers, transients, and untidy housekeepers - and adjust your price accordingly. If you are buying a condominium in a building populated with young people, you may find it difficult to interest a retired couple (if that's your market) in living in the unit.

Investing in rental property can be very profitable, but you should be fully informed before you invest, or you could end up with more work and less return than you anticipated.

Please ask for help if you are considering this investment strategy.

Tax breaks

Tax law changes so frequently that you must be concerned with tax planning year-round, or you'll miss opportunities to lower your tax bill. Are are some common areas that can mean big money savings with proper planning.

1. Familiarize yourself with the income levels at which various tax breaks phase out. While it doesn't make sense to make less income just to qualify for a tax break, shifting income from one year to another may sometimes be a smart thing to do.

Learn about the tax credits and deductions for which you might qualify. Then estimate your income, and if it will be just beyond qualification range, look for opportunities to defer income until a later year. Investment income can often be shifted, or you might delay the exercise of stock options or the receipt of a bonus.

2. Don't pay tax on a home sale. The law lets you sell your home tax-free if you meet certain requirements.

The home must have been owned and used as your principal residence for at least two of the five years prior to the sale. Couples can enjoy $500,000 of tax-free profits in a home sale, while singles qualify for up to $250,000 of tax-free gain.

To the extent possible, time home sales to meet the requirements in order to enjoy tax-free profits.

3. Factor education tax breaks into your college planning.

First, there's the American Opportunity credit for a percentage of qualified higher education expenses.

Second, the Lifetime Learning credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity credit isn't claimed, and it even applies to job-related classes.

Third, you may qualify for a deduction for interest paid on student loans.

Fourth, education savings accounts allow annual nondeductible contributions for every child under 18, with tax-free withdrawals for qualifying education expenses. These section 529 plans are great tools to save for college expenses.

Check the income phase-out levels for these breaks. Careful planning is required to find what's best in your particular circumstances.

4. Invest to take advantage of lower long-term capital gains tax rates. You can cut your tax bill significantly by holding an appreciated investment long enough to qualify for long-term rather than short-term tax treatment.

5. Conduct an investment review to confirm you have the right investments in your tax-deferred accounts. To take best advantage of the lower long-term capital gains tax rates, investments that produce interest income should be held in tax-deferred accounts, while those that produce capital gains should be held in taxable accounts. Putting capital gain investments in tax-deferred retirement accounts could turn income that would be taxed at lower rates into ordinary income taxed at much higher rates.

6. There's never been a better time to contribute to an IRA. Even nonworking spouses may be able to contribute to an IRA. Individuals covered by a retirement plan at work or whose spouses are covered by a plan may still qualify to make deductible IRA contributions if their income doesn't exceed certain levels.

7. Your IRA options may include a Roth IRA. With a Roth IRA, your contributions won't be tax-deductible, but the account will grow tax-free, and you won't pay federal income tax on distributions from the account once it's been in existence for five years and after you've reached age 59½.

8. Consider rolling your IRA into a Roth. If you have a traditional IRA, you might want to consider rolling your existing IRA into a Roth IRA. You'll have to pay income tax on the rollover, but the account can escape federal income taxation thereafter.

9. If you work at home, get details on the home office deduction. More people can now qualify to take a deduction for home office expenses. Your home office may qualify as your "principal place of business" if you use it regularly and exclusively for administrative and management activities but perform the income-producing activities at another location.

Realize that in tax planning, the earlier you start, the more effective your tax-cutting efforts will be. Also realize that not every strategy is appropriate for everyone.

With the future of Social Security uncertain and company pension plans being cut back, careful management of your 401(k) becomes very important. Here are some basic guidelines to help you make the most of your 401(k) investments:

Start early. A 25-year-old employee who saves $300 a month will accumulate over $1 million by age 65 (assuming an 8% annual rate of return). By waiting ten years and still investing the same amount ($300 a month), that employee would accumulate less than $500,000 by age 65.

Be willing to take some risks. Over the long term, you aren't likely to beat inflation by placing all your money in ultra-conservative investments. If you are more than five years from retirement, consider putting at least a portion of your money into stock funds. A fund that mirrors the overall stock market, for example, is likely to beat inflation.

Don't invest too much in your own company's stock. Even if you're confident that your company will be profitable for years to come, it's seldom a good idea to tie your financial future to one firm. In some cases, employees are locked into their employer's stock, but if you have a choice, consider diversifying your 401(k) funds.

Don't be quick to borrow from your 401(k). Although you can repay principal and interest to yourself, dipping into your 401(k) will reduce its earning power. If it's available, a home-equity loan may be a better alternative, especially since the interest is generally tax-deductible.

Don't raid your 401(k) when you change jobs. Resist the temptation to deplete your retirement savings when you change employers. If it's allowed, leave what you have in your old plan or roll the money into your new employer's 401(k). Another option is to roll the funds into an IRA.

Review your portfolio at least once a year. If you've decided to keep 60% of your 401(k) in stock funds, a bull market can push the stock portion of your portfolio beyond the limits you've set. By readjusting your portfolio annually, you'll maintain the desired mix.