Avoid the 50% Penalty! Understanding Required Minimum Distribution (RMD) Rules

 

5 0 percent.jpg

Every year thousands of taxpayers are hit with a heavy 50% 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Exception To determine the amount that must be withdrawn each year you need to go to the correct life expectancy table published by the IRS in Publication 590IRS in Publication 590. There are three tables:

  • : Owners of qualified Roth IRA accounts

The confusion of multiple tables

  1. Joint & Last Survivor.

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

  1. Uniform Lifetime Table.
  2.  

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

  1. 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  • The amount must be withdrawn by December 31st of the year.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 RMDRMD, 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? H

ere 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% or greater owner of the business sponsoring the retirement plan you must take an RMD when 70 ½ whether retired or not.

 

IRS Warns Taxpayers Using Premium Tax Credit

File your tax return or else

In order to continue receiving a Premium Tax Credit in 2017 you must file income tax returns as soon as possible. Any delay could stop eligibility for advance payments of this credit during 2017. Remember, these payments help reduce each month’s health insurance premium. It could also generate notices from the IRS to pay back some or all 2016 advance payments of the credit.

Background

Those who use the Affordable Care Act to purchase health insurance on the Marketplace are often eligible to reduce their insurance premium using the Premium Tax Credit. Many had the credit sent directly to their health insurance company each month to reduce their premium. This is called “advance payments of the premium tax credit” by the IRS.

Current Situation

The IRS is now reviews payments of the Premium Tax Credit. To continue receiving the credit in 2017 you must file tax returns. If you filed an extension and do not plan to file your tax return until October 15th, you could be ruled ineligible for the credit in 2017 because you have not yet filed your tax return.

Impact

Your insurance premiums could increase in 2017 if you are ruled ineligible for the advance premium credit payment. This could cause financial hardship. You may be asked to repay 2016 Premium Tax Credit Payments as well.

Action

If you received any Premium Tax Credit or expect to do so in the future, you must file tax returns as soon as possible per the IRS.

Call if you need a review of your situation.

Protect Yourself From Port-Out Scams

Mobile phones not only contain our personal details and information about everyone we know; they are used to verify our identities and unlock access to our financial accounts.Now scammers are using a process called a “port-out” to hack into our phones to change our passwords, steal our personal data and even empty our bank accounts.

Basics of the Port-Out Scam

A port-out scam starts by manipulating the legitimate process you can use to move your mobile phone number from one carrier to another. A scammer calls a carrier and impersonates you to request that your mobile phone number and SIM card data be transferred to a new carrier and device owned by the scammer.

Once the scammer successfully ports out your number in this way, they are often able to use it as leverage to gain access to your bank accounts. That’s because like other online accounts, banks will respond to requests to change your password by sending the new password or a PIN to your phone.

Once the scammer uses a ported-out phone to change your passwords, not only are you locked out from accessing your accounts, but the scammer can now begin emptying them.

The key security vulnerability of the port-out scam is with the mobile phone carrier. When a customer calls to request changing their phone number to another carrier and device, the carrier will ask them to provide a PIN number. For some U.S. carriers including T-Mobile, the default PIN has been the last four digits of the customer’s Social Security number.

You may have heard that last year more than 143 million Americans had their data exposed in a hacking security breach at the credit reporting agency Equifax. The information exposed included names linked with phone numbers and Social Security numbers. In other words, everything a hacker would need to try a port-out scam.

Recently, T-Mobile sent text messages to customers warning them to change their PINs. It also set up a port-out protection page.

No matter what carrier you use, it’s worthwhile updating your security information and PIN. It can take only minutes and it may avoid the devastating consequences of this scam. Make sure that the new PIN you choose is different from your carrier account password.

 

2019 Health Savings Account Limits New contribution limits are on the horizon

The savings limits for the ever-popular health savings accounts (HSA) are now set for 2019. The new limits are outlined here with current year amounts noted for comparison.

What is an HSA?

An HSA is a tax-advantaged savings account used to pay qualified health care costs for you, your spouse and your dependents. When contributions are made through an employer, they are made on a pre-tax basis. There is no tax on the withdrawn funds, the interest earned or investment gains as long as the funds are used to pay for qualified medical, dental or vision expenses. Unused funds may be carried over from one year to the next. To qualify for this tax-advantaged account you must be enrolled in a high-deductible health plan (HDHP).

The limits

2019 HSA LimitsNote: An HDHP plan has minimum deductible requirements that are typically higher than traditional health insurance. To qualify for an HSA, your coverage must have out-of-pocket payment limits in line with the maximums noted above.

Not sure what an HSA is all about? Check with your employer. If they offer this option in their health care benefits, they will have information explaining the program and its benefits.

Tax Cuts and Jobs Act Update

The Tax Cuts and Jobs Act (TCJA) was passed by Congress in a hurry late last year, and the IRS has been working to implement the changes for 2018. Here are the latest answers to some of the most common questions about the tax overhaul:

Check Is home equity interest still deductible?The short answer is: Not unless you’ve used the money to buy, build or substantially improve your home.

Before the TCJA, homeowners were able to take out a home equity loan and spend it on things other than their residence, such as to pay off credit card debt or to finance large consumer purchases. Under the old tax code, they could deduct interest on up to $100,000 of such home equity debt.

Tax Cuts and Jobs Act
The TCJA effectively writes the concept of home equity indebtedness out of the tax code. Now you can only deduct interest on “acquisition indebtedness,” meaning a loan used to buy, build or substantially improve a residence. If you took out a home equity loan pre-2018 and used it for any other purpose, interest on it is no longer deductible.
Check I’m a small business owner. How do I use the new 20 percent qualified business expense deduction?

Short answer: It’s complicated and you should get help.

Certain small businesses structured as sole proprietors, S corporations and partnerships can deduct up to 20 percent of their qualified business income. But that percentage can be reduced after your taxable income reaches $157,500 (or $315,000 as a married couple filing jointly).

The amount of the reduction depends partly on the amount of wages paid and property acquired by your business during the year. Another complicating factor is that certain service industries including health, law, consulting, athletics, financial services and accounting are treated differently.

The IRS is expected to issue more clarification on how these rules are applied, such as when your business is a mix of one of those service industries and some other kind of business.

Check What are the new rules about dependents and caregiving?There are a few things that have changed regarding dependents and caregiving:

Check Deductions. Standard deductions are nearly doubled to $12,000 for single filers and $24,000 for married joint filers. The code still says dependents can claim a standard deduction limited to the greater of $1,050 or earned income plus $350.
Check Kiddie Tax. Unearned income of children under age 19 (or 24 for full-time students) above a threshold of $2,100 is now taxed at a special rate for estates and trusts, rather than the parents’ top tax rate.
Check Family credit. If you have dependents who aren’t children under age 17 (and thus eligible for the Child Tax Credit), you can now claim $500 for each dependent member of your household for whom you provide more than half of their financial support.
Check Medical expenses. You can deduct medical expenses higher than 7.5 percent of your adjusted gross income as an itemized deduction. You can claim this for medical expenses you pay for a relative even if they aren’t a dependent (i.e. they live outside your household) as long as you provide more than half of their financial support.

Stay tuned for more guidance from the IRS on the new tax laws, and reach out if you’d like to set up a tax planning consultation for your 2018 tax year.

Handling Health Care Coverage Gaps

Health care coverage gaps happen. Whether because of job loss or an extended sabbatical between gigs, you may find yourself without health care for a period of time. Here are some tax consequences you should know about, as well as tips to fix a coverage gap.

Coverage gap tax issues

You will have to pay a penalty in 2018 if you don’t have health care coverage for three consecutive months or more. Last year the penalty for a full uncovered year was equal to 2.5 percent of your household income or $695 per adult (and $347.50 per child), whichever is higher. The 2018 amounts will be slightly higher to adjust for inflation.

Example: Susan lost her job-based health insurance on Dec. 31, 2016, and applied for a plan through her state’s insurance marketplace program that went into effect on April 1. Because she was without coverage for three months, she’ll owe a fourth of the penalty on her 2017 tax return (three of 12 months uncovered, or 1/4th of the year).

How to handle a gap in health care coverage

While the penalty is still in place for tax years 2018 and earlier, it is eliminated starting in the 2019 tax year by the Tax Cuts and Jobs Act.

Three ways to handle a gap

There are three main ways to handle a gap in health care coverage:

Check COBRA. If you’re in a coverage gap because you’ve left a job, you may be able to keep your previous employer’s health care coverage for up to 18 months through the federal COBRA program. One downside to this is that you’ll have to pay the full premium yourself.
Check Marketplace. You can buy an insurance marketplace health care plan through Healthcare.gov or your state’s online portal. Typically, you can only sign up for or change a Marketplace plan once a year. But you can qualify for a 60-day special enrollment period after a major life event, such as losing a job, moving to a new home or getting married.
Check Applying for an exemption. If you are without health care coverage for an extended period, you may still avoid the penalty by qualifying for an exemption. Valid exemptions include unaffordability (you must prove the cheapest health insurance plan costs more than 8.16 percent of your household income), income below the tax filing threshold (which was $10,400 for a single filer below age 65 for 2017), ability to demonstrate certain financial hardships, or membership in certain tribal groups or religious associations.

Protect Yourself From Port-Out Scams

Mobile phones not only contain our personal details and information about everyone we know; they are used to verify our identities and unlock access to our financial accounts.

Now scammers are using a process called a “port-out” to hack into our phones to change our passwords, steal our personal data and even empty our bank accounts.

Basics of the Port-Out Scam

A port-out scam starts by manipulating the legitimate process you can use to move your mobile phone number from one carrier to another. A scammer calls a carrier and impersonates you to request that your mobile phone number and SIM card data be transferred to a new carrier and device owned by the scammer.

Once the scammer successfully ports out your number in this way, they are often able to use it as leverage to gain access to your bank accounts. That’s because like other online accounts, banks will respond to requests to change your password by sending the new password or a PIN to your phone.

Protect yourself from Port-Out scams
Once the scammer uses a ported-out phone to change your passwords, not only are you locked out from accessing your accounts, but the scammer can now begin emptying them.

How to Protect Yourself

The key security vulnerability of the port-out scam is with the mobile phone carrier. When a customer calls to request changing their phone number to another carrier and device, the carrier will ask them to provide a PIN number. For some U.S. carriers including T-Mobile, the default PIN has been the last four digits of the customer’s Social Security number.

You may have heard that last year more than 143 million Americans had their data exposed in a hacking security breach at the credit reporting agency Equifax. The information exposed included names linked with phone numbers and Social Security numbers. In other words, everything a hacker would need to try a port-out scam.

Recently, T-Mobile sent text messages to customers warning them to change their PINs. It also set up a port-out protection page.

No matter what carrier you use, it’s worthwhile updating your security information and PIN. It can take only minutes and it may avoid the devastating consequences of this scam. Make sure that the new PIN you choose is different from your carrier account password.

Here are the pin protection links at the other three major U.S. carriers:

Check AT&T
Check Sprint
Check Verizon

Managing Money Tips for Couples

Couples consistently report finances as the leading cause of stress in their relationship. Here are a few tips to avoid conflict with your long-term partner or spouse:

Check Be transparent. Be honest with each other about your financial status. As you enter a committed relationship, each partner should learn about the status of the other person’s debts, income and assets. Any surprises down the road may feel like dishonesty and lead to conflict.
Check Discuss future plans often. The closer you are with your partner, the more you’ll want to know about the other person’s future plans. Kids, planned career changes, travel, hobbies, retirement expectations — all of these will depend upon money and shared resources. So, discuss these plans and create the financial roadmap to go with them. Remember that even people in a long-term marriage may be caught unaware if they fail to keep up communication and find out their spouse’s priorities have changed over time. Managing money tips for couples
Check Know your comfort levels. As you discuss your future plans, bring up hypotheticals: How much debt is too much? What level of spending versus savings is acceptable? How much would you spend on a car, home or vacation? You may be surprised to learn that your assumptions about these things fall outside your partner’s comfort zone.
Check Divide responsibilities; combine forces. Try to divide financial tasks such as paying certain bills, updating a budget, contributing to savings and making appointments with tax and financial advisors. Then periodically trade responsibilities over time. Even if one person tends to be better at numbers, it’s best to have both members participating. By having a hand in budgeting, planning and spending decisions, you will be constantly reminded how what you are doing financially contributes to the strength of your relationship.
Check Learn to love compromise. No two people have the same priorities or personalities, so differences of opinion are going to happen. One person is going to want to spend, while the other wants to save. Vacation may be on your spouse’s mind, while you want to put money aside for a new car. By acknowledging that these differences of opinion will happen, you’ll be less frustrated when they do. Treat any problems as opportunities to negotiate and compromise. Instead of looking at the outcome as “I didn’t get everything I wanted,” think of it as “We both made sacrifices out of love for each other.”

Leveraging Your Children’s Lower Tax Rate One of the best places for parents to look for tax savings

If you’re a parent, your dependent children can be a source of tax savings. There are the well-known provisions in the tax code such as the Dependent Child Care Credit and the Child Tax Credit, but there’s also an opportunity to shift some taxable income to your children.

Shifting income to your children works because the tax rate increases as your income rises. This provides an incentive to shift income to your lower-earning dependent children. Here’s how to make it work:

Shifting income rules

In 2018, the first $1,050 of unearned income for each child is not taxed and the next $1,050 in unearned income is taxed at the lowest rate of 10 percent. Typical unearned income includes interest, dividends, royalties and investment gains.

Tip: Transfer enough income-producing assets to each child to approach the annual unearned income limits as closely as possible. Depending on your marginal tax rate you could be saving as much as 37 percent in federal income tax on the transferred amounts.

Tip: In addition to the unearned income, consider purchasing investments that will have long-term capital gain appreciation. This may help manage the timing and rate of capital gains tax when the investment is later sold.

Tip: Remember excess investment income could be subject to the additional 3.8 percent Medicare surtax. Any investment income that can be shifted to your children could also save you this additional tax bite as well.

Caution: The Tax Cuts and Jobs Act passed last year now uses the estates and trusts tax rates to calculate a “kiddie tax” on any unearned income over $2,100. Using that tax table, your child’s unearned income rate would scale up to 37 percent after it surpasses $12,500.

Leverage your children’s earned income

Income your children make from wages is considered earned income. If you own a small business, finding ways to employ your children can be a way to shift income from your higher tax rate to their lower rate. Care must be taken to be able to defend the work being done by your child and the amount they receive for their work. Some ideas include:

  • Use your child in an advertisement for your business.
  • Have your child clean your office a few times per week.
  • Put your child in charge of making local business deliveries.
  • Have your child help assemble items or help with mailings.

Tip: If you are a sole proprietor you may hire your dependent children under age 18 and won’t be required to pay Social Security and Medicare taxes.

Caution: Moving assets from you to your children could affect their ability to receive financial aid for college. Make sure to consider how your tax strategy affects college financing.

There are many opportunities to leverage the tax advantages of having children. Reach out if you’d like help creating a plan for your family.

Is a Section 529 plan the right college savings plan for you?

There are many ways to save for college, but one thing is certain: it is never too early to start. One way to save for college is with a “Section 529” plan. These plans offer a way to pay for college expenses with some nice tax advantages.

What are they?

Section 529 plans allow you to set up a tax-advantaged account to pay for your child’s college education. There are two types of Section 529 plans: prepaid tuition programs and college savings plans.

  • Prepaid tuition programs let you lock in today’s tuition costs by purchasing tuition credits or certificates that a student redeems when he or she starts college.
  • College savings plans let you make contributions to a state-sponsored savings account to build a fund for your child’s college expenses. These accounts are generally managed by a private mutual fund company. This is the Section 529 plan you’ve probably been hearing about, and it is this type of college plan that is the focus of this article.

How do Section 529 college savings plans work?

  • Make a gift to set up an account. You start by setting up an account and naming your child (or anyone else) as the beneficiary. Your contribution is considered a gift. Your contributions qualify for the $14,000 annual tax-free gift exclusion ($28,000 for married couples making a joint gift).Special rules for 529 plans let you average your gift over five years. This means married couples can make a $140,000 joint gift and individuals can make a $70,000 gift in a single year, without incurring gift tax. However, you cannot make additional gifts to your child for five years, or you may owe gift tax.
  • Your contribution is limited. You aren’t permitted to make contributions to a 529 plan beyond what is necessary to pay for your child’s college expenses. Each plan sets its own limit.Most plans allow you to make either a lump sum contribution or a series of monthly contributions. All contributions must be made in cash; you can’t contribute shares of stock or other property to these plans.
  • You remain in control. You cannot choose the investments in the fund – you must choose one of the plan’s investment options. However, you do remain in charge of all withdrawal decisions. You can allow your child to make withdrawals to pay for college expenses. If your plan permits it, you can change the beneficiary to one of your other children. If you change your mind about maintaining the account, you can even request a refund (tax and penalties will apply).
  • Your child can withdraw money to pay for college expenses. Section 529 funds must be used for qualified higher education expenses, such as tuition, fees, books, and supplies. They can also be used to cover certain room and board expenses, as long as your child attends school at least half-time. If your child receives a scholarship, you can request a penalty-free refund up to the amount of the scholarship. In addition, you can withdraw the funds if your child becomes disabled or dies.If the funds are withdrawn for any other purpose, you (not your child) pay tax on the earnings that have accumulated in the fund.
  • You can change plans. You can make a tax-free rollover to another plan with the same beneficiary. That allows you to move your child’s plan to another state’s plan without losing the tax benefits. This tax-free rollover treatment only applies to one transfer within any 12-month period.

What are the benefits?

  • Section 529 plans offer tax benefits. Your contribution is not tax-deductible, but your investment grows tax-deferred. That allows your money to grow faster than a similar investment in a taxable account. Qualified distributions from Section 529 college savings plans are tax-free.
  • Section 529 plans offer an estate planning opportunity. Section 529 plans let wealthy parents or grandparents transfer wealth out of an estate and into an account a child can use to pay for college expenses.

What are the disadvantages?

While these plans offer an attractive alternative to other college funding plans, they are not without drawbacks. There are a number of factors you should consider before you invest in a Section 529 college savings plan.

  • Substantial penalties apply to nonqualified withdrawals. Any nonqualified distributions will be subject to withdrawal fees and penalties. You’ll also owe income tax on the distribution.
  • Your state plan may not meet your investment expectations. You should choose from among the available plans the one that meets your risk tolerance and performance expectations. But what if you are unhappy with a plan’s investment performance? If your plan allows rollovers, you can move the funds into another plan. If you simply request a refund, you’ll have to pay income tax and penalties on the distribution.

Do your homework.

The same federal income tax rules apply to all Section 529 college savings plans. However, each plan has unique features. Here are some items you should compare when you evaluate different plans.

  • State income taxes.
  • Investment return.
  • Enrollment fees.
  • Maximum contributions.
  • Flexibility in making contributions.
  • Withdrawal fees and penalties.
  • Transferability to another beneficiary or another qualified plan.
  • Choice of schools.
  • Participation by nonresidents.
  • Beneficiary age restrictions.
  • Covered education expenses, including restrictions on room and board.

Section 529 plans provide an attractive, tax-favored way to save for college. However, they are not the right choice for everyone.