Cincinnati, Ohio Estate Planning

Is It Time for a Roth IRA or a Roth 401(k)?

“Roth accounts may make more sense than traditional, pre-tax ones, when savers believe their tax rate is lower now than it will be in retirement.”

This may be the best of all possible times to take advantage of the Roth IRA or Roth 401(k). These special retirement accounts let savers put away money after it has been taxed, which means that withdrawals are tax free. Contributions to a traditional IRA or 401(k) are made with pre-tax dollars, explains CNBC in the article “Why now might be a good time to save in a Roth 401(k) or Roth IRA” and taxes are paid on withdrawals made during retirement. The taxes paid on withdrawals are hoped to be lower because retirement income is usually lower than working income. However, with today’s historically low tax rates, there’s only one way for taxes to go—up—and that might mean that withdrawals from traditional accounts could actually be taxed higher than they are now.

The Tax Cuts and Jobs Act reduced income tax rates for individuals. The top marginal income tax rates for individuals dipped from 39.6% to 37%. However, the national budget deficit has grown to nearly $1 trillion in 2019, largely because of spending increases and big reductions in revenue because of the changes to the tax law. How’s this for size: the U.S. budget deficit is larger, as a share of its economy, than that of three dozen—yes, 36—other developed countries in the Organization for Economic Co-operation and Development.

Many experts think that this level is unsustainable and will have to lead to tax increases in the near future to bring in more revenues. One advisor noted that there’s a “giant economic storm that’s brewing,” and says there will be pressure to raise taxes.

Roth accounts would shelter savers from increases to the income tax rate. This won’t protect savers from non-income tax increases, such as a consumption tax or a wealth tax.

Nearly 18% of U.S. households have a Roth IRA, totaling $800 billion in assets nationally. By comparison, 26% of household have a traditional IRA, with a total value of $7.5 trillion. More companies are offering employees Roth 401(k)s to their workers.

Unless lawmakers extend the Tax Cuts and Jobs Act, income-tax rates for individuals are scheduled to increase to pre-tax law levels in 2026. Will lawmakers extend them? It is not likely, given the deficit levels. Therefore, saving in a Roth now could be a smart move.

Another viewpoint is that trying to outsmart the tax laws won’t pay off at all, and that Congress might decide to tax Roth accounts, if the government gets desperate for revenue.

That school of thought says that savers should divide their retirement savings in a 50/50 split and put the money in both Roth and traditional retirement accounts. The goal is to “tax-diversify,” just as you diversify investments.

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).

Reference: CNBC (Dec. 27, 2019) “Why now might be a good time to save in a Roth 401(k) or Roth IRA”

Three Key Employee Benefits for People Working Past 65

“The labor force participation rate for the 65-to-74 age cohort is projected to be over 30% by 2026, according to the Bureau of Labor Statistics. It was about 27% in 2016.”

There are some advantages to working past 65. However, if you don’t manage them correctly, it could cost you, says the article “Working past 65? Don’t overlook these 3 key facts about your employee benefits” from CNBC.

There are a number of reasons why people keep working, from saving more for their retirement to maintaining their employer-subsidized health insurance plans and increasing Social Security benefits. Some people actually enjoy their work and the social interactions it provides and don’t necessarily want to stop. Whatever the reason, benefit enrollments need to be navigated carefully.

Health Insurance and Medicare. Once you celebrate your 65^th birthday, you are eligible for Medicare. The catch is, you need to coordinate your workplace coverage with your participation in this federal healthcare program. Whether you are required to enroll, depends upon the size of your company. If you work at a company with fewer than 20 employees, chances are you’ll have to sign up. Medicare will become your primary insurer. If your company has more than 20 employees, it must continue to provide you with health insurance, regardless of your age.

When you finally sign up for Medicare, you have a seven-month initial enrollment period to sign up. If you miss that window, you may be subject to a 10% late-enrollment penalty on your Medicare Part B premiums. The penalty is applicable for each 12-month period for which you were eligible but didn’t sign up.

If you are older and still employed, you are eligible for a penalty-free, eight-month special enrollment period, once you or your spouse lose workplace coverage.

Do a side-by-side comparison of workplace benefits versus Medicare before you make the decisions. You should note that COBRA does not count as qualified employer coverage.

Health Savings Account and Medicare

As long as you have a high-deductible plan with a health savings account (HSA) at work, you cannot contribute to it once you’ve signed up for Medicare. You can save money on a pre-tax basis in an HSA and have it grow tax-free. When you make withdrawals for qualified medical expenses, those distributions are also tax-free. However, if you don’t sign up for Medicare because you have your health insurance through an employer, you can continue to contribute to your HSA.

Required Minimum Distributions

What if you are close to turning 70½? That is when you’ll need to start taking required minimum distributions from your 401(k) or individual retirement accounts. These withdrawals are taxable. If you are still working, here’s the advantage: if you are participating in a 401(k) plan, you might not have to take this distribution until you retire. It depends upon your plan—so be prepared to read some fine print or ask your HR department for details.

There are some exceptions. If you own more than 5% of the company, you still must take the RMDs. You can only postpone RMDs from the 401(k) at your current employer. If you have IRAs and 401(k)s from any other employers, you’ll need to take those withdrawals. Here’s another bit of good news—if your company’s plan allows it, you may be able to roll your IRA back into the 401(k) and delay it altogether, if you don’t need the money. Speak with an estate planning attorney to be sure that your situation permits this.

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).

Reference: CNBC (Nov. 5, 2019) “Working past 65? Don’t overlook these 3 key facts about your employee benefits”

Yes, You Have to Pay Taxes on Retirement Account Withdrawals—and On Time

“I had never worked with a financial advisor, so I didn’t really understand that there would be a specific age that would come along, regardless of whether or not I was working, and bang, I would have to withdraw this money, whether or not I needed it,” he says.

Once you celebrate your 70^th birthday, you may start seeing a lot of notices in the mail from financial institutions about taking withdrawals from IRAs and other kinds of retirement accounts. Those letters are going to arrive, even if you are still working and have no plans to retire, says Money, in an article titled “Don’t Miss This Key Tax Deadline.”

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

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

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

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

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

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

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

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

The more you can control your RMDs, which means advance planning, the better. This is something that should be integrated with your entire estate plan, which has (or should have) a tax planning component.

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).

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

Make the Most of Your Retirement Savings Potential

“Everyone wants to retire with ample savings in their bank account. Plan your retirement, by avoiding these eight common IRA mistakes.”

IRAs, or Individual Retirement Accounts, are great tools for retirement savings. The best tactic says Born2Invest in the article “Retirement planning: 8 common IRA mistakes” is to make the most of your IRA, as early in your career as possible. That will give you a larger nest egg later in life.

Avoid these classic errors and keep that IRA growing!

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

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

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

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

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

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

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

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

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plan or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).

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

Stretch IRA Changes Could Be Coming – Cincinnati Estate Planning

IRAs have become an important estate planning tool. However, as Congress seeks ways to raise revenue, they might make those IRAs less desirable for estate planning purposes.

Over the last few decades, estate planners, in Cincinnati and elsewhere, have grown very fond of IRAs. The retirement accounts allow people to name a beneficiary who gets the account automatically without the need for a will or trust, after the current account holder passes away.

It is a very simple way to pass wealth to the next generation that has many uses in estate planning.

IRAs make estate planning easier, in most cases.

With one type of IRA, known as a stretch IRA, the beneficiary of the account can even delay taking out required minimum distributions and save a lot on taxes.

However, that benefit is now coming under fire as Kiplinger reports in "Death of 'Stretch' IRAs Would Mean Loss of Flexibility for Beneficiaries."

Congress is considering doing away with the ability to stretch IRAs for non-spouse beneficiaries, if the accounts hold more than $450,000.

This proposal has passed in the Senate Finance Committee as it is expected to raise federal revenue by a substantial amount. If this passes and becomes law, estate plans will need to be revisited.

This idea is not yet currently law.

However, people who uses IRAs as an important part of their estate plans would be advised to keep an eye on this issue and to start thinking about alternatives for their estate plans.

It would not be a good idea to get caught off guard.

Should this pass, failure to adjust your estate plans could cost your heirs large sums of money.

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website. If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526). 

Reference: Kiplinger (August, 2017) "Death of 'Stretch' IRAs Would Mean Loss of Flexibility for Beneficiaries."

Making Charitable Contributions Work – Cincinnati Estate Planning

While you're alive and have philanthropic goals, give appreciated assets held in a taxable account to charity. For charitable bequests, designate your IRA or tax-deferred employer retirement plan. Why? Suppose a hypothetical Al Cole wants to give $10,000 to charity this year. Instead of cash, he donates $10,000 of ABC Corp. stock that he bought for $2,000. As long as Cole's holding period is more than one year, he'll get a full $10,000 charitable tax deduction. Yet those shares might be worth only $8,000 to Cole after paying tax if he sold them himself. The retirement planning and estate planning benefits are big. Say Cole has $1 million of securities: $500,000 in a taxable account and $500,000 in a traditional IRA. Cole wants to leave $500,000 to charity and $500,000 to his son Bob, who is in a high income tax bracket. If Cole leaves the taxable account to charity, Bob will inherit the IRA. Bob will have to take distributions, which will be highly taxed on top of his other income. Instead, Cole can leave his $500,000 IRA to charity. The charity or charities can cash in the IRA bequest and owe no tax, as they are tax-exempt. Now Bob will inherit the $500,000 taxable account. He won't owe any income tax on money he withdraws. He also won't owe any capital gain if he happens to sell securities in the account right away, before they gain more value. That's because he gets a cost basis step-up to market value on those assets.

Investor's Business Daily's recent article, "How You Can Squeeze Tax Breaks From Charitable Giving," says that this maneuver works very nicely if the taxable account holds appreciated securities. A Partial Payout strategy applies whether you want to bequest all or just some of your IRA. Experts suggest that it's better to use your IRA for donations in your estate plan. But you have to decide how you want to do it.

Consider the following scenario as an example: Ida Bass has a $500,000 traditional IRA, and she wants to leave $50,000 to charity from that IRA. The rest of the IRA is to be split evenly between her two children (Many IRA beneficiary forms require percentage allocations for multiple beneficiaries). Another way to do it would be for Ida to just leave 10% of her IRA to charity. The IRA form could designate that each of her kids will inherit 45% of the amount in the account at her death. This would leave the dollar size of her charitable bequest indefinite—potentially leaving more to the charity if the IRA grows or less if its value decreases.

Whether you implement the fixed amount or the percentage approach, problems can arise. Those who will inherit the balance of the IRA need to ensure that the charity is paid in full before September 30^th of the year after the death of the donor. If you do that, those getting the balance can stretch out required distributions of the IRA balance and extend their tax deferral. However, if you miss the September 30^th deadline, the taxable distributions will be accelerated. So individual beneficiaries should be aware of what they need to do if a charity also is on the form.

One other idea is to split the IRA. Bass could transfer $50,000 from her $500,000 IRA to a new IRA account, so that her favorite charity would be the beneficiary of the new IRA. That way her children won't have to worry about the charity if they want to claim the maximum tax deferral from the IRA they inherit.

Speak with an experienced Cincinnati estate planning attorney to learn more and to see if this strategy is right for you.

Remember: “An ounce of prevention is worth a pound of cure.” When making your estate plans or when probating an estate or administering a trust, do not go it alone. Be sure to engage a Cincinnati estate planning attorney.

For more information about estate planning, probate or trust administration in Cincinnati (and throughout the rest of Southwest Ohio) and to review free resources regarding estate planning, probate or trust administration, visit my website.  If you have questions regarding this article or a particular legal matter, feel free to contact me at 513-399-PLAN (7526).

Reference: Investor's Business Daily (October 02, 2015) "How You Can Squeeze Tax Breaks From Charitable Giving"