Tag

distributions

What To Do With Your 401(k), If…

By | 2020, Money Moxie | No Comments

1: You are still employed by the sponsor company

Keep investing! The 401(k) implements an effective purchasing strategy called dollar- cost averaging. This strategy involves making regular and continuous fixed-dollar investments. But it is more than just a payroll deduction plan. Dollar-cost averaging removes the risk of trying to time the market.

By using dollar-cost averaging in a long-term investment account, the average cost per share ends up being less than the average price per share. This is because you buy less shares when prices are high and more shares when prices are low. In other words, volatility can work in your favor. So keep investing.

2. You are no longer working for the sponsor company but are employed elsewhere

You have some options.

(1) You can take a partial or full distribution. In most cases, this is a taxable event and may carry additional tax penalties. In rare situations, is this a good idea. Speak with a professional advisor before choosing this option.

(2) You can leave your 401(k) with your previous company. You can no longer contribute to it, but it will continue to perform based on the investments you have selected.

(3) If your new employer offers a 401(k) and you are eligible for it, you can roll your old 401(k) into your new 401(k) plan. This is a tax-free rollover, and you will need to select new investments based on what the new plan offers.

(4) You can roll the old 401(k) into an IRA. In most cases, this is what we recommend. An IRA gives the account owner more control, more investment options, and better planning opportunities than a 401(k). Like a 401(k), an IRA is a retirement account with annual maximum contribution limits and early withdrawal penalties. A rollover is not considered a contribution, and therefore any amount can be rolled.

3. You are no longer working for the sponsor company and are not employed

You have the same options as above, with the obvious exception of rolling to your new 401(k). If you are retired, however, the rollover option to the IRA may be even more appealing. When it comes time to take distributions from your retirement accounts, the IRA has some significant advantages. Some of these include better risk management strategies, tax-saving distribution strategies, and avoiding mandatory distributions from Roth accounts.

4. You need financial help due to COVID-19

The CARES Act allows some individuals to take early withdrawals from retirement accounts in 2020 without the early withdrawal penalty. If you have been diagnosed with COVID-19, have a spouse or dependent diagnosed with COVID-19, or have experienced a layoff, furlough, reduction in hours, have been unable to work, or lack childcare because of COVID-19, you may qualify. Withdrawals may impact your tax liability, so speak with a financial advisor before taking an early distribution.

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A Neglected Tax-Saving Strategy: Qualified Charitable Distributions

By | 2020, Money Moxie, Newsletter | No Comments

There are two types of people who complain about paying taxes, men and women. We all recognize the importance of taxes, but Gerald Barzan said it best, “Taxation with representation ain’t so hot either.” Yes, tax evasion is illegal, but tax avoidance…that’s wisdom. Tax avoidance should also be a financial advisor’s specialty. This is precisely why I’m so surprised by the number of financial and tax professionals who are unfamiliar with, or do not utilize, the Qualified Charitable Distribution.

The Qualified Charitable Distribution, or QCD, is a powerful tax savings strategy available to individuals age 70.5 and older who donate to 501(c)(3) organizations. Examples of 501(c)(3) organizations include religious, educational, and scientific organizations, public charities, and private foundations.

When you take a distribution from a tax-deferred retirement account, the distribution will be taxed at your marginal tax rate. However, if the distribution is from an Individual Retirement Account (IRA) and is sent directly to a 501(c)(3) organization, it qualifies as a QCD and becomes tax-free.

For example, Elliott has a required minimum distribution from her IRA of $3,000. Her tax rate is 20% federal and 5% state. Elliott plans to donate $3,000 to a 501(c)(3) organization this year. If Elliott takes the $3,000 distribution and pays the tax, she’ll receive $2,250 from her IRA. When she makes her $3,000 donation, she will be $750 short.

However, Elliott has a wise financial advisor who tells her about the QCD. So, she sends her $3,000 IRA distribution directly to the charity, and Elliott doesn’t pay tax on the distribution at all. Elliott’s required minimum distribution is satisfied for the year, she donates the desired $3,000 to charity, and her wise financial advisor saved her $750 in taxes.

Every year, we educate financial and tax professionals regarding the QCD and how to report it on the form 1040. Too often, we see it reported incorrectly. If you make a QCD and do not report it accurately, you won’t receive the benefit. If Elliott or her CPA doesn’t understand how to report her $3,000 QCD, she’ll pay an extra $750 to the IRS, and the QCD won’t save her anything.

On tax form 1040, line 4a asks for “IRA distributions,” and line 4b asks for the “taxable amount” as shown below.

Elliott took a $3,000 distribution from her IRA and will write $3,000 on line 4a. She will then subtract her QCD amount from 4a and write the balance on line 4b. In Elliott’s case, she will write $0 on line 4b, and no tax will be due from her IRA distribution. A tax penny saved is a tax-free penny earned.

Please help us get the word out regarding the Qualified Charitable Distribution. If you, your CPA, or your friends have questions about QCDs or other tax-saving strategies, please contact us. Tax planning is our specialty, and tax avoidance is the goal.

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Complacency through Success, Be Warned!

By | 2016, Executive Message, Money Moxie, Newsletter | No Comments

Dear Valued Financial Partners and Friends,

Managing your retirement dollars is truly a two-stage process. During your accumulation phase—in your younger years—your saving and investing process is pretty much on automatic. You sign up for your employer’s 401(k) plan by marking a few boxes and signing a few forms. You basically set it and forget it. Right or wrong, your 401(k) is on autopilot without you making many adjustments.

The accumulation process can be dangerously deceptive. The years of automatic saving and investing could set you up mentally and emotionally for something we affectionately call the “Complacency through Success Syndrome,” exactly at the wrong time.

At retirement, complacency through your savings success may lull you to sleep. Like many people, you may suffer from financial hypothermia. At retirement you have to wake up from your successful accumulation days and become actively involved. Specifically, you have to take your retirement funds off autopilot and switch to being proactively involved in making multiple and intertwined financial decisions. For many people this is very uncomfortable and not easy. It is fraught with so many moving parts and numerous and dangerous landmines and booby-traps. And, you don’t get a do over!

For you, your retirement distribution phase doesn’t have to be ominous and painful. Because helping you succeed financially is what we do. And we’ve done this for 34 years. Believe it or not, protecting clients from themselves in making unwise and imprudent financial decisions is one of the most important things we do!

Here are some of the landmines that can blow up (or undo) your lifetime-savings nest egg: elections and timing on pensions, Social Security, Medicare, IRAs, and 401(k)s to name just a few.

Other potential problems include not dealing with a fiduciary (not all financial professionals are required to put your interests first), promises of high returns, meaningless guarantees, and so forth. Smedley Financial Services, Inc.® has been a fiduciary since our first day in business, June 4, 1982. We can help you avoid financial landmines and scams. We put your interests first and are bound by law to do so.

So don’t self-sabotage what you have worked for all of your financial life. If you think financial planning is expensive, try ignorance! None of us can afford to make financial mistakes at retirement. Your financial success is our passion!

Bullish Best Wishes,

Roger M. Smedley, CFP®
President

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IRA Charitable Donations Are Back…and This Time They Are Here to Stay!

By | 2016, Money Moxie | No Comments

For those of you over age 70 ½, a very beneficial tax law is back on the books thanks to the Protecting Americans from Tax Hikes (PATH) act signed into law on December 18, 2015.

The PATH act has a provision that allows you to donate IRA money directly to a qualifying charity and avoid paying any tax on the distribution. Even better, the distribution still counts toward your Required Minimum Distribution. Officially it is called a Qualified Charitable Distribution or QCD. Those who took advantage of it in previous years will be glad it is back.

Even better, the PATH act is now permanent. In the past, Congress has only approved the measure in 1- or 2-year increments, which has made it difficult to plan for the future.

Some people have wondered what the difference is between making a QCD directly to a charity or taking the money and then donating it to the charity personally. The main difference is that a QCD does not increase your income on your tax return (AGI). This may not sound like a big deal, but the implications can be large.

By not increasing your income you may reduce or possibly avoid paying taxes on Social Security. Also, if your income is lower, you may avoid paying the Alternative Minimum Tax (AMT).

To explore this in detail let’s look at an example. Let’s say Henry wants to get the money first and then donate it to a charity. If his required minimum distribution was $10,000 and he withheld $2,000 for taxes, he would get a check for $8,000. Henry would then deposit that check in his checking account and write out a personal check to the charity.

Next year Henry would get to include the $8,000 (not the full $10,000) as a deduction on his taxes. However, his income (AGI) will still be higher by $10,000, which may result in his Social Security being subject to higher taxes and/or his deductions being limited by AMT.

The other option is for Henry to donate the $10,000 directly to a charity. His income (AGI) isn’t increased and he doesn’t have to pay any taxes on the distribution. Also his charity is benefited by the full $10,000. That is an additional $2,000 to charity at no extra cost to Henry! The decision seems to be fairly easy.

If you plan to donate money to a charity and you have to take a Required Minimum Distribution, give us a call so we can help you take full advantage of this reinstated tax law.
Source: http://www.wsj.com/articles/congress-gives-americans-a-tax-gift-for-christmas-1450434600.
Smedley Financial and its advisors do not provide personal tax advice. It is important to coordinate with your tax advisor regarding your situation.

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