Archive for Retirement

A STEEP PRICE FOR MEDICARE recommended by Paul Ferraresi

Planning may help high income seniors avoid paying up to four times the going rate for Part B and Part D coverage.

In 2017, the standard premium for Medicare Part B is $134 a month. Most enrollees pay for Part B via reductions in their Social Security benefits, and the overall average monthly fee is $109.

Yet some senior pay almost quadruple that much – $428.60 a month ($957.20 for married couples) – for the exact same medical insurance.

Seniors who pay more for Part B also pay Medicare as much as $76 per month extra for prescription drug coverage, known as Part D.

This is the IRMAA – the income related monthly adjustment amount. If people are on Medicare, and their tax return shows high income, Medicare adds the IRMAA amount to their monthly premium.

Modified adjusted gross income over $85,000 ($170,000 on joint returns) brings IRMAA into play, with amounts increasing as MAGI hits certain thresholds. (Here, MAGI includes tax-exempt interest income.)

THE TWO-YEAR LAG

The Medicare trustees’ 2016 report projects that Part B monthly premiums, which have risen from a maximum of $161.40 in 2007 to $428.60 today, will continue to climb, reaching as much as $564 in 2025. Thus, Medicare Part B is likely to become more of a financial planning issue.

One key is to realize that there is a two-year lag between the income observed by Medicare and the resulting payments. Money that flows into a Medicare enrollee’s pocket in 2017 will be reported on a tax return filed in 2018, which determines Part B premiums due in 2019.

When seniors retire, they may pay the higher premium for two more years until that income history drops off their records. In order to reduce Part B premiums sooner than two years, you should appeal your higher IRMAA premium immediately upon retirement, if your income has dropped dramatically. One of the things that could qualify Medicare recipients for an IRMAA reduction is that they have stopped working.

You will qualify for the appeal under the life-changing event of ‘work stoppage.’ You can call Social Security or visit in person to present evidence of retirement to have your Medicare premiums recalculated.

IRA TROUBLE by Paul Ferraresi

What you think should happen to an IRA distribution and the actual outcome is two different things.

This great article (see link below) from the April 17, 2017 issue of https://www.financial-planning.com shows the tax horror stories that can develop.

The Lesson: Get competent advice from your advisor before doing anything with your IRA.

https://www.financial-planning.com/news/when-an-inherited-ira-becomes-a-tax-nightmare

IRA Mistakes on RMD – Part 2 by Paul Ferraresi

IRA RULES
One of the benefits of IRAs is that RMDs for multiple IRA accounts can be aggregated. This includes SEP and Simple IRA accounts. The RMD should be calculated for each account separately, but after that, the RMD amounts can be added together and taken from any one or a combination of accounts.

403(b) ACCOUNTS
A similar aggregation rule exists for 403(b) accounts. A person with more than one 403(b) account can calculate the RMD for each account and then add the RMDs together. The total can then be taken from one or a combination of 403(b) accounts.

EMPLOYER PLANS
RMDs from employer plans, not including 403(b) plans and SEP and Simple IRAs, cannot be aggregated. A person with multiple 401(k), governmental 457(b) or other employer plans must calculate the RMD for each individual plan and take that RMD from that plan only.

ROTH IRAs
There is no need to worry about whether Roth IRA RMDs can be consolidated because Roth IRAs have no RMDs during the account owner’s lifetime. It can’t get much simpler than that.

Any plan making a series of substantially equal payments over a period of 10 years or more, or over life expectancy, cannot aggregate that payment with the RMD from any other retirement account. The distribution from the account making these substantially equal payments is considered the RMD from the account only.

The following is a practical example:

What Happens When a Person Gets RMD Aggregation Wrong?

There are two potential penalties when people make RMD aggregation mistakes: the penalty for excess contributions and the penalty for missed RMDs.

THE 6% PENALTY
RMDs that are rolled over to another retirement plan create an excess contribution in the receiving account, which must be corrected as soon as possible.

When an excess contribution is corrected by Oct. 15 of the year after the year for which the contribution was made, the amount of the excess plus or minus the gains or losses attributable to the amount of the excess contribution must be removed from the account as well.

Excess contributions that are not corrected are subject to a penalty of 6% per year for every year they remain in the account. Form 5329 should be filed with the IRA owner’s tax return to report the excess contribution and to calculate the 6%.

THE 50% PENALTY
When a distribution is taken from the wrong type of account, you have a missed RMD. For example, suppose a person accidentally takes the 403(b) RMD from his IRA. This is against the rules. The person has a missed RMD in the 403(b). The penalty for a missed RMD is a steep one – it is 50% of the amount not taken.

Protected: IRA MISTAKES ON RMD – PART 1 by Paul Ferraresi

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Roth IRA/401(k)?

Income tax rates, established under the 16th amendment in 1913, move like a pendulum in a clock. The movement is extreme at each end from ultra high top rates (94% in 1945) to low top rates (24% in 1929). Over all the years the average top rate has been 58% (this does not include state, city or local taxes). At the end of 2016 the top rate is 39.6% plus the 3.8% Obamacare surcharge for a grand total of 43.4% at the federal level. The new Trump administration is proposing 3 rates of 12% – 25% and a top rate of 33%. Think long term in your life. If these lower rates do take place then over time a “regression to the mean” states that rates have to rise in the future (during your retirement years).

One of our goals, at Founders Group, is for each client to have 80% – 100% of their retirement income to be TAX FREE for life. It takes time and planning. It cannot be done at the last minute.

My question to you ……… wouldn’t it make sense to sock money away in tax free investments when rates are low, today, and then harvest the money when tax rates are higher in your retirement years??? There are a few fantastic vehicles to accumulate money for tax free retirement income. For the “do-it-yourself” crowd there are Roth IRAs or Roth 401(k) plans. The problem with both is there are so many strings attached (how much you can contribute, when you can take monies out, etc). Here is some information on Roth’s:

You can take money out of your Roth IRA anytime you want. However, you need to be careful how much you withdraw or you may get stuck with a penalty. In order to make “qualified distributions” in retirement, you must be at least 59 ½ years old, and at least five years must have passed since you first began contributing.

You may withdraw your contributions to a Roth IRA penalty-free at any time for any reason, but you’ll be penalized for withdrawing any investment earnings before age 59 1/2, unless it’s for a qualifying reason. Money that was converted into a Roth IRA cannot be taken out penalty-free until at least five years after conversion.

Not sure whether the money will be counted as contributions or earnings? Well, the IRS view withdrawals from a Roth IRA in the following order: your contributions, money converted from traditional IRAs and finally, investment earnings. For example, let’s say your IRA has $100,000 in it, $50,000 of which are contributions and $50,000 of which are investment earnings. If you withdraw $60,000, the IRS will consider $50,000 of that to be contributions and $10,000 to be earnings. So any penalty would apply only to the $10,000.

There are more sophisticated vehicles that magnify a Roth program and make Roth’s look like child’s play. These programs have been around since 1913 and require education and guidance by a professional adviser.