5 After Tax Balance Rules for Retirement Accounts - AGT The Safe Money People

Most retirement plan participants use pretax assets to fund their employer-sponsored plans such as 401(k) and 403(b) accounts, or they claim a tax deduction for amounts contributed to their Traditional IRAs. In both cases, these contributions can help to reduce the individual’s taxable income for the year to which the contribution applies. However, it is also possible to contribute amounts to employer-sponsored plans on an after-tax basis, and for IRAs, contributions can be non-deductible. The advantage of accumulating after-tax assets in a retirement account is that when they are distributed, the amounts will be tax- and penalty-free. However, this benefit is realized only if the necessary steps are taken.

Keeping Track of Your After-Tax Assets

 

Reaping the benefits of this strategy starts with good record-keeping and clear communication with your plan administrator and the IRS.

Your Qualified Plan Account

The administrator for your qualified plan is responsible for keeping track of which portion of your balance is attributed to after-tax assets and pretax assets. However, it helps if you check your statements periodically to ensure that the tabulations match what you think they should be. This will allow you to clarify possible discrepancies with the plan administrator.

Your IRA

Your IRA custodian is not required to keep track of the after-tax balance in your IRA, and most, if not all, do not. As the owner of the IRA, you are responsible for keeping track of such balances, and this can be accomplished by filing IRS Form 8606.

If you make a non-deductible contribution to your Traditional IRA, or roll over after-tax assets from your qualified plan account to your IRA, you must file IRS Form 8606 for the year the amount is contributed to the IRA. While the IRS does not currently require Form 8606 to be filed for rollover of after-tax amounts, it may be a good idea to record such amounts for your records. Form 8606 lets the IRS know that the amount represents after-tax assets, and it helps you keep track of the balance of your IRA that should be tax-free when distributed. Form 8606 must also be filed for any year in which distributions occur from any of your Traditional, SEP or SIMPLE IRAs and you have accumulated after-tax amounts in any of these accounts. Make sure you read the important filing instructions that accompany Form 8606 – they provide details on the sections of the form that must be completed.

Tax Treatment of After-Tax Assets

 

Qualified Plans

Generally, your plan administrator will indicate the taxable portion of amounts distributed from your qualified plan account on the Form 1099-R that you receive for the year. If the amount is not properly indicated on the 1099-R, you may want to request written confirmation from the plan administrator of the portion of the distribution that is attributable to after-tax assets. This will help to ensure you include the correct amount in your taxable income for the year.

IRAs

With the exception of ‘return of excess contributions,’ your IRA custodian is not required to make a distinction between the taxable and non-taxable portion of amounts distributed from your Traditional IRA. You must provide that information on your income tax return by indicating the entire amount of the distribution versus the amount that is taxable. For more information, see the instructions for line 15a of IRS Form 1040. The aforementioned Form 8606 will help you determine the taxable and non-taxable portions of amounts distributed from your Traditional IRA.

Pro-Rata Treatment of Distributions

If your qualified plan or 403(b) account or Traditional IRA includes after-tax amounts, distributions usually include a pro-rata amount of your pretax and after-tax balance. For this purpose, all of your Traditional, SEP and SIMPLE IRAs are treated as one account. For instance, assume that you made an average of $20,000 in after-tax contributions to your Traditional IRA over the years and your Traditional IRA also includes pretax assets of $180,000, attributed to rollover of pretax assets and deductible contributions. Distributions from your IRA will include a pro-rata amount of pretax and after-tax assets. Let’s look at an example using these numbers.

Example

John has several IRAs, which consist of the following balances:

§  Traditional IRA No. 1, which includes his non-deductible (after-tax) contributions of $20,000

§  Traditional IRA No. 2, which includes a rollover from his 401(k) plan in the amount of $150,000

§  Traditional IRA No. 3, which is really a SEP IRA, which includes SEP contributions of $30,000

Total $200,000

In 2013, John withdraws $20,000 from IRA No. 1. John must include $18,000 as taxable income from the $20,000 he withdrew. This is because all of John’s Traditional, SEP and SIMPLE IRAs are treated as one IRA for the purposes of determining the tax treatment of distributions, when John has basis (after-tax assets) in any of his Traditional, SEP or SIMPLE IRAs.

The following formula can be used to determine the amount of a distribution that will be treated as non-taxable:

Basis / Account Balance x Distribution Amount = Amount Not Subject To Tax

Using the figures in the example above, the formula would work as follows:

$20,000 / $200,000 x $20,000 = $2,000

Since IRS Form 8606 includes a built-in formula to determine the taxable amount of distributions from your Traditional IRAs, you may not need to use this formula for distributions from your IRA.

For qualified plan accounts that include a balance of after-tax amounts, distributions are usually pro-rated to include amounts from pretax and after-tax balance. This means that, similar to IRAs, you can’t choose to distribute only your after-tax balance. However, certain exceptions apply. For instance, if your account includes after-tax balances accrued before 1986, these amounts may be distributed in full, resulting in the entire amounts being non-taxable, rather than being pro-rated.

Rollover of After-Tax Balance

 

If your retirement account balance includes after-tax amounts, whether these amounts can be rolled over depends on the type of plan to which the rollover is being made.

The following is a summary of the rollover rules for these amounts:

§  IRA to IRA: All rollover eligible amounts can be rolled over to an IRA. This includes after-tax amounts.

§  IRA to Qualified Plan/403(b): All rollover eligible amounts can be rolled over to a qualified plan/403(b), provided the plan allows it. However, this does not include after-tax amounts – such amounts cannot be rolled from an IRA to a qualified plan/403(b).

§  Qualified Plan/403(b) to Traditional IRA: All rollover eligible amounts can be rolled over to a Traditional IRA. This includes after-tax amounts.

§  Qualified Plan/403(b) to Qualified Plan/403(b): All rollover eligible amounts can be rolled over to another qualified plan/403(b), provided the plan allows it. This includes after-tax amounts, provided these amounts are transacted as direct rollovers.

The Bottom Line

 

Bear in mind, this is just an overview of the rules that apply to your after-tax balance in your retirement account. Having a thorough understanding of the rules will ensure that you include the right amount in your taxable income for the year you receive a distribution from your retirement account, thereby not paying taxes on amounts that should be tax-free. As always, be sure to consult your tax professional for assistance to make sure that your after-tax assets are treated correctly on your tax return, and so that you know what tax forms to file each year.

Source: http://www.investopedia.com/articles/retirement/05/ aftertaxassets.asp

4 Steps to Building an Emergency Fund - AGT The Safe Money People

Ben Franklin once declared, “A penny saved is a penny earned.” Yet, equally enlightening are his thoughts on expenses: “Beware of little expenses. A small leak will sink a great ship.”

And there are plenty of “leaks” that can scuttle an already-tight budget. For instance, a spouse idled by the sour economy, a fender bender with the family car, or an unexpected hospitalization. That’s why financial advisors recommend that you have a rainy-day fund—enough liquid assets to cover three to six months’ worth of emergency living expenses. In case of financial emergency, access to additional money will save you from relying on credit cards or loans that simply compound the problem.

When starting an emergency fund, here are a few tips to abide by:

1.    Determine what amount is best for you. Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Your specific situation – whether you have children, carry substantial debt and types of insurance coverage you have – will determine what amount is best for you. Examine your situation — your income and your needs — to decide how much you should save.

2.    Start small. Starting an emergency fund can be as simple as depositing $100 into your high-interest savings account. But before you begin, be sure that you’re meeting your basic living expenses. And as you build your emergency fund, be sure you’re also reducing your spending and avoiding debt.

3.    Stick to a schedule. Get into the habit of making regular deposits. Whether it is weekly, bi-weekly or monthly, create a schedule and stick to it. Once you make saving automatic, you won’t even have to think about it.

4.    Consider an online savings account. In many cases, an “online” savings account may make more sense than an account at a traditional, bricks-and-mortar bank. That’s because many traditional banks are not currently offering a savings option with interest rates high enough to meaningfully beat inflation. In addition, an online savings account is a reliable way to manage your money.

Source:http://www.copyrightfreecontent.com/newsusa/4-steps-to-building-an-emergency-fund/

Take the Leap: How Does a 366-Day Year Affect Payroll?

Is it possible to have two leap years back to back? For HR and payroll professionals, the answer is yes with two anomalous payroll years in a row. With 27 pay periods in 2015 and 366 days in 2016, employers should review their payroll and employment tax practices, and communicate with employees about any potential impact to their paychecks. Most employers have already decided how they’ll address the extra pay period occurring in 2015, but some employees could still have questions. While some employers will divide a salaried employee’s yearly payment total by one extra period (for example: a worker’s typical salary would be divided between 27 bi-weekly payments as opposed to the usual 26), others may elect to pay their employees for an extra pay period at their regular rate of pay. An unchanged yearly payment stretched over an extra pay period will help keep payroll costs stable, but it means that employees will see lower payments each period than they may have expected. On the other hand, one extra paycheck at the usual rate means a plus for employees, but it also increases payroll totals on the year. Just as HR professionals put the irregularity of 2015 behind them, 2016 will bring a calendar leap year and yet another payroll quandary. Employers will need to make sure they’re complying with any payroll tax implications of the unusual payroll year. With leap day falling on Monday, February 29, 2016, many salaried workers may wonder how their compensation will be affected and ask, “Is the company getting an extra day of work for free?” “TODAY” addressed this question during the last leap year in 2012; it turns out the answer depends on your current pay practices. A typical year has 52 weeks plus one day, but a leap year has 52 weeks plus two days. That extra day could mean another paycheck for employees if it falls on a designated payday in your payroll system. For businesses using accrual accounting systems, the extra day could be built in to the yearly total, and for hourly workers, it will mean an additional opportunity to log hours. Discussing how your business will account for the leap year with your workers can help reduce confusion. No matter your payroll structure, be ready to explain the implications of a leap year with any concerned employees and make sure your employment tax processing accounts for any changes your payroll team makes for 2016.

4 Tips for Financially Independent Women | AGT The Safe Money People

Is there a meaningful difference in the way men and women consider money? There is, according to a study published in a recent issue of Social Indicators Research.

Women associate money with love and emotion, according to the research, while men are twice as likely to link finances to independence and power. While the differences are not mutually exclusive, researcher’s hope the general findings will help people better understand their relationship with money, which may lead to better-informed financial decisions.

“Also, it’s helpful to remember that, historically, women haven’t had control of their own financial destiny; and that includes many women who are retired today,” says Leah Miller, a financial and Medicare expert, and CEO of Red Anchor Wealth Management (www.redanchorretirement.com).

“Despite the fact that women control most of the economy today and tend to be the CFO of most households, many continue to get the short end of the stick – especially when it comes to retirement. Women live longer and are often the ones to find out that they’ve outlived their money.”

Speaking directly to women, Miller offers context on how to face emotionally the stress of financial planning for retirement.

Make the most of your time on this Earth. 

A long life shouldn’t be a bad thing. If you’re married with a husband, you’ll likely enjoy many years together sharing Social Security, a pension or IRA income and other sources. However, much of that money won’t be there should you outlive your husband. Many women may be prone to avoiding thoughts of life after their spouse moves on. While that may be romantic in a sense, Miller says, it is highly impractical if you’re trying to live a long and fulfilling life.

Money keeps women up at night.

People don’t like to think about the things that cause them pain. For women, the stress of an uncertain financial future is a huge pain. While there is a way to feel much better about this uncertainty, millions of women avoid troubleshooting this latent and palpable stressor. It’s like someone who is desperate to lose weight but is too afraid to step on the scale.

Anxiety is worse than actually taking care of the problem (getting started). 

If you are the family chief financial officer, then abstracting a future budget is an easy step to start with. The important goal of retirement planning is to craft an income stream that will sustainably support your needs, so start accounting now. Make a balance sheet that includes your savings account, retirement accounts, 401(k) plans, investment real estate, stocks, bonds, mutual funds, annuities, cash value life insurance and other assets. Then break it down further by pre-tax and post tax-accounts.

Don’t take your estate for granted; beware the pre-Medicare timeframe.

Some women have it better than others, but beware of overconfidence, because you can fall ill anytime. For example, the average couple who retires at age 62 will spend $17,000 out-of-pocket on health care each year until they enroll in Medicare. And, that’s basically the cost of the premium, so even in good health the price is very high. A nice nest egg in combination with other assets can be depleted rapidly with insufficient Long Term Care insurance.

“Some of these considerations may be unpleasant, but what’s the alternative?” Miller says. “Don’t bury your stressful feelings. Instead, do something about it. You’ll feel better and you’ll be better off as you move forward.”

Tips for Affordable Traveling in 2016 | AGT The Safe Money People

If travel is a part of your plan for the new year, 2016 looks to be a good time to do it. You don’t have to break the bank, but if you do want to save cash it’s all about where you’re going and how you book getting there.

Planning is key to saving money on travel. NBC Charlotte spoke with Sarah Gavin with Expedia. She says you can save up to 36 percent by booking at least 21 days out.

For domestic travel, you’ll save the most by booking 57 days out. For international flights, you’ll get the best deals by booking 150 to 170 days in advance. You can also save more money by searching for flights on specific days of the week.

Right now, Gavin says the weekend is the best time to get online and book your flights. Gavin says if you are planning international travel, certain destinations will save you more money. She says 2016 will be a good year to fly to Asia because the cost is down about 15 percent from last year. It’s also a good time to go to Europe.
Fuel prices are down, and Gavin says the airlines are passing on the savings.

Another tip for getting the most for your money, Gavin says to bundle your flight and hotel just like you bundle your cable and internet. She says you can save about 20 percent, which is about $570 for the average trip. For resort destinations, the savings are even higher. You can save between $800 and $1100 on a week-long trip.

Changes to Social Security – Primarily the file & suspend strategy | AGT The Safe Money People

Congress is putting an end to two Social Security filing strategies that many couples have used to add tens of thousands of dollars to their retirement incomes. But there’s a six-month window in which couples who are at least 66 years old can take advantage of them, as well as a partial reprieve for some others.

The implications of the new Social Security rules became clearer Friday after the Senate passed the budget bill that includes the changes. The measure will become law after President Barack Obama signs it.

The strategies under fire—known as file-and-suspend and a restricted application for spousal benefits—have made it possible for both members of a couple who are 66 or older to delay claiming benefits based on their own earnings records while one pockets a so-called spousal benefit based on the other’s earnings.

To do this, one individual files for benefits and suspends them, while the other files a restricted application to collect only a spousal benefit—not his or her own earned benefit even if it would be higher. That way, both individuals can take advantage of delayed retirement credits, which increase their earned benefits by 6% to 8% for each year in which they defer claiming between the ages of 66 and 70—and one gets some income from Social Security in the meantime.

Combined, the strategies can boost lifetime retirement income by as much as $60,000 or more, says William Meyer, chief executive of SocialSecuritySolutions.com, a service that identifies Social Security claiming strategies likely to yield the highest amount over a beneficiary’s life span.

While the new law shuts down the two strategies, some people can still take advantage of them—provided they act fast. For those for whom the strategies will be off limits, meanwhile, claiming decisions may become less complicated but also less lucrative.

Here’s what you need to know:

A six-month window before new rules kick in.

Under the new law, individuals will still have the ability to suspend their benefits. But Social Security will no longer allow relatives to submit a new claim for spousal or dependent child benefits based on the earnings record of a worker who has suspended his or her own benefits. However, that provision won’t go into effect for six months from the date President Obama signs the budget bill.

As a result, if you are 66 or older now—or will turn 66 within the next six months—there might be an advantage in filing and immediately suspending your benefit. That would give a spouse who is also 66 or older the option to file a restricted application for only a spousal benefit and receive that benefit while both of you delay claiming on your own records. But both you and your spouse must act within the six-month window.

There’s a similar window for individuals at full retirement age who have children under age 18 or disabled adult children. Those who are 66 or older—or will turn 66 within the next six months—can file-and-suspend so their children can claim dependent benefits. Again, both parties need to take action within six months.

If you won’t turn 66 until after the six-month window closes, your relatives won’t receive a dime unless you are already receiving your benefits, says Web Phillips, senior legislative representative at the National Committee to Preserve Social Security and Medicare, a nonprofit advocacy group.

Some people get a break.

Families who are already using these strategies will be grandfathered. Their benefits will not be changed or interrupted due to the legislation, says Mr. Phillips.

Also, if you turned 62 this year or are older, you will still be able to file a restricted application for only a spousal benefit starting at age 66. This will allow you to receive a spousal benefit while you defer claiming your own benefit so that it can grow larger.

After file-and-suspend is phased out in six months, to take advantage of this, your spouse must already be claiming a benefit, said Michael Kitces, director of planning research at Pinnacle Advisory Group Inc. in Columbia, Md.

When married individuals apply for a retirement benefit other than with a restricted application, they are deemed to have filed for both their own earned benefit and a spousal benefit, and will receive whichever is higher, instead of having a choice to get one and switch to the other later.

Flexibility on retirement vs. survivor benefits remains.

Generally, widows and widowers won’t be affected by the new law, says Mr. Meyer. And individuals who are eligible for both earned and survivor benefits will continue to have a couple of claiming strategies open to them, making careful comparison worthwhile.

Starting at age 60, a survivor can take a reduced benefit based on his or her deceased spouse’s benefit—and then switch to his or her own benefit later if it is higher. Alternatively, the survivor can start with his or her own benefit as early as age 62 and then switch to a full survivor benefit at full retirement age.

One of these strategies is often better than simply sticking with one benefit or the other.

If you’re divorced.

The restricted-application changes also apply to people who are divorced.

Under current law, a divorced individual who is 66 or older and was married at least 10 years but is currently unmarried can claim a benefit based on the ex-spouse’s earnings record while allowing his or her own benefit to grow. A former spouse is generally entitled to file such a claim once an ex turns 62, says Mr. Phillips.

But under the new law, only those who turned 62 this year or are older will be able to file to do this when they turn 66. Younger divorced people will receive either their own earned benefit or a spousal benefit—whichever is higher—instead of having a choice to take one and switch to the other later. You must be unmarried to get a divorced spouse benefit.

The fate of one key difference in the rules for those who are divorced is unclear: Under current law, you can collect a benefit based on an ex’s work record even if he or she isn’t yet collecting a benefit, as long as the ex is at least 62. But due to the new rule on file-and-suspend, it’s unclear what would happen to a spousal benefit claim if an ex had suspended his or her benefit.

“This was likely not intended and will hopefully be fixed,” says Mr. Kitces.

Tax facts about long-term care insurance - AGT The Safe Money People

Traditional long-term care insurance (LTCI) policies that meet the IRS requirements are treated as tax-qualified policies. These policies can generate tax breaks for clients, but those breaks depend on the client’s circumstances. (Non-tax-qualified policies don’t provide any tax advantages.) Here’s what you need to know.

Premium Deductibility

LTCI policyholders who itemize their deductions and have unreimbursed medical expenses that exceed 10 percent of their adjusted gross income can deduct eligible LTCI premiums. (Eligible premiums are age-based; see IRS Publication 502 for the current limits.) The hurdle for taxpayers age 65 and older is 7.5 percent of AGI through 2016. Those conditions mean that few policyholders will ever claim that deduction, according to Scott Olson with LTCShop.com in Yucaipa, CA.

“Nobody has medical expenses that high,” he said. “If they do, they probably can’t qualify for long-term care insurance. So, for somebody who’s a (IRS Form) W-2 employee, there’s not going to be much hope in terms of getting any pretax dollars or income tax benefits unless they live in a state that has a nice credit.”

Jayne Van Zile, CLTC with JVZ Strategies in Rochester, NY, has not seen any W-2 employees claim a deduction for their premiums. If the client did have that level of medical expenses, she notes, it’s likely they would qualify for a waiver of premium on their LTCI coverage. The group that does get a tax break for is self-employed who show a net profit, she adds. Sole proprietors can deduct eligible LTCI premiums as accident and health insurance and they can include premiums paid for their spouses and eligible dependents, regardless of the AGI percentage threshold.

“A perfect example is a professor who does some consulting on the side and generates, say, $10,000 of income annually on a 1099 basis,” she said. “That professor can take the premium and if they’re between 51 and 60 years old, that person plus their spouse can reduce their adjusted gross income in 2015 by $1,430 a person or if they’re 61 or over, it jumps to $3,800 per person.”

State Tax Credits

As Olson pointed out, some states provide incentives in the form of tax credits or deductions for residents’ LTCI premiums. The American Association for Long-Term Care Insurance (AALTCI) summarizes the available state-level tax breaks on its website. 

Some states provide little or no financial incentive to buy LTCI but others are generous. For example, New York residents are entitled to a 20 percent tax credit on any tax-qualified LTCI premium paid regardless of income, age, or premium, said Van Zile. The catch is that the taxpayer must have a New York State tax liability—policyholders can’t receive a credit greater than the amount of tax they owe. “It is a significant benefit and I have found clients take this into account when determining their out-of-pocket costs,” she said.

Paying with an HSA

Tax-qualified LTCI premiums are considered to be a qualified medical expense. Consequently, taxpayers with health savings accounts (HSAs) can make tax-free withdrawals to pay their LTCI premiums. Some additional criteria apply, but paying premiums from a HSA can still cut out-of-pocket costs. “Someone who owns a health savings account, even if they’re a W-2 employee, can use the money in the health savings account to pay for their long-term care insurance on a pretax basis,” said Olson.

Tax breaks matter

In New York, a self-employed person can take both the available Federal deduction and the New York state tax credit, said Van Zile. Many of her clients are self-employed and she says that they take these tax incentives seriously. Olson agrees that tax savings are an incentive. Potential tax breaks are not a primary concern for prospective buyers but the topic almost always comes up, he says. The buyers typically initiate that discussion and want to know if their premiums will be tax deductible. Olson responds by asking additional questions about their employment status and deductions; that information gives him an idea of the likely tax result.

“The main question that I’ll ask is if they or their spouse or partner are self-employed or have any type of self-employment income because self-employed people get the best deductions for long-term care insurance,” he said. “That actually is a pretty high percentage of my clients. I mean, probably close to half of my clients are self-employed or they are a small-business owner.”