Six Tips for Working Beyond Retirement Age

Credit Score Ingredients

Two-thirds of the Baby Boomer generation are now working or plan to work beyond age 65, according to a recent Transamerica Institute study. Some report they need to work because their savings declined during the financial crisis, while others say they choose to work because of the greater sense of purpose and engagement that working provides.

 

 

Whatever your reason for continuing to work into your golden years, here are some tips to make sure you get the greatest benefit from your efforts.

Bullet Point Consider delaying Social Security. You can start receiving Social Security retirement benefits as early as age 62, but if you continue to work it may make sense to delay taking it until as late as age 70. This is because your Social Security benefit may be reduced or be subject to income tax due to your other income. In addition, your Social Security monthly benefit increases when you delay starting the retirement benefit. These increases in monthly benefits stop when you reach age 70.
Bullet Point Don’t get bracket-bumped. Keep in mind that you may have multiple income streams during retirement that can bump you into a higher tax bracket and make other income taxable if you’re not careful. For instance, Social Security benefits are only tax-free if you have less than a certain amount of adjusted gross income ($25,000 for individuals and $32,000 for married filing jointly in 2017), otherwise as much as 85 percent of your benefits are taxable.

Required distributions from pensions and retirement accounts can also add to your taxable income. Be aware of how close you are to the next tax bracket and adjust your plans accordingly.

Bullet Point Be smart about health care. When you reach age 65, you’ll have the option of making Medicare your primary health insurance. If you continue to work, you may be able to stay on your employer’s health care plan, switch to Medicare, or adopt a two-plan hybrid option that includes Medicare and a supplemental employer care plan.

Look over each option closely. You may find that you’re giving up important coverage if you switch to Medicare prematurely while you still have the option of sticking with your employer plan.

Bullet Point Consider your expenses. If you’re reducing your working hours or taking a part-time job, you also have to consider the cost of your extra income stream. Calculate how much it costs to commute and park every day, as well as the expense of meals, clothing, dry cleaning and any other expenses. Now consider how much all those expenses amount to in pre-tax income. Be aware whether the benefits you get from working a little extra are worth the extra financial cost.
Bullet Point Time to downsize or relocate? Where and how you live can be an important factor determining the kind of work you can do while you’re retired. Downsizing to a smaller residence or moving to a new locale may be a good strategy to pursue a new kind of work and a different lifestyle.
Bullet Point Focus on your deeper purpose. Use your retirement as an opportunity to find work you enjoy and that adds value to your life. Choose a job that expresses your talents and interests, and that provides a place where your experiences are valued by others.

 

Seven Common Retirement Account Mistakes

Retirement Mistakes

It is all too easy to make a mistake that can cost you plenty if you do not actively manage your retirement assets. Here are some common retirement account mistakes that can easily be avoided.

 

 

 

 

 

 

Bullet Point Borrowing money, then leaving your job. Those with employer-provided retirement accounts, such as 401(k)s, can often borrow money from their accounts. Unfortunately if you leave your job, this money must be repaid immediately. If it’s not repaid, your loan will be considered a withdrawal of funds, creating a hefty tax bill and early withdrawal penalty.
Bullet Point Incorrect rollover of funds. If you plan on moving funds from one retirement account to another, do not have the withdrawal check issued to you. If the funds are not correctly redeposited, your transfer could be deemed a taxable event.

Better: Create a trustee-to-trustee transfer. By having the funds go directly from one retirement account to another, you eliminate the risk of the IRS assuming you made a withdrawal.

Bullet Point Waiting until 70½ before taking money out. A key concept in retirement planning is to make your retirement accounts as tax efficient as possible. This often means taking money out of an account before you actually need it. When you reach age 70½ or older most retirement accounts require you to take a minimum distribution based on a formula.

Better: Review your tax situation each year. It may make sense to take a withdrawal out of a retirement account now in order to pay a lower tax compared with the tax on a required distribution when you are older.

Bullet Point Not reviewing beneficiaries. The beneficiaries of most retirement accounts have priority over what is stated in your will. This can have unintended consequences.Better: Review your retirement account beneficiaries each year. Note alternative beneficiaries if allowed within the account.
Bullet Point Not reviewing your investment mix. Many make their retirement investment decisions when they set up their account and then leave it alone. But as you age, your investment mix should change. Your account can also become out of balance as funds perform at different rates.Better: Review your funds annually, rebalance your funds and replace poorly performing funds as needed. Your employer or trustee appointed advisors can help you make investment decisions that meet your needs.
Bullet Point Not maximizing your employer contributions. Most employer-provided retirement accounts include an employer-provided contribution. Often this is a matching contribution where your employer will match 50% to 100% of your contribution up to a percent of your pay. Not taking advantage of this free money is one of the worst mistakes you can make.
Bullet Point Not participating. And the worst retirement account mistake? Not participating. Unless your retirement plan is to win the lottery, you will need income during your retirement years. You are never too young or old to start saving for a retirement free from financial worry.

Collectibles and the Tax Collector

Collectible Coins

It typically takes a great deal of personal interest and expertise in a given field — whether it’s rare art, coins or baseball cards — to judge a treasure from a trinket. For those of you who have been bitten by the collector’s bug, here are some tax considerations.

 

Collectibles defined

According to the IRS: “Collectibles include works of art, rugs, antiques, metals (such as gold, silver, and platinum bullion), gems, stamps, coins, alcoholic beverages, and certain other tangible properties.” 1 What makes something a collectible is that it carries additional value based on its rarity and its market demand. Essentially, the opinion of other collectors and experts, based on what they are willing to pay for your collection, determines its value.

For example, a typical one-ounce gold coin is worth about $1,200 based upon the value of the metal and would not be considered a collectible by the IRS. However, a rare antique double eagle gold coin produced in the 19th century could be worth $20,000 to a collector, even though it is made of exactly the same amount of gold as the non-rare coin.

Collectibles special tax rate

When collectibles are sold, they become taxable at a maximum tax rate of 28 percent. The tax applies to profit on the sale of your collectibles.

That tax rate is considerably higher than the average capital gains tax of 15 percent that most people pay for non-collectible investments such as stocks and bonds (the tax range for long-term capital gains is from 0 to 20 percent). The exception to this rule is that if you’ve held your collection less than a year before you sell it, your capital gain will be taxed as regular income.

It’s all about the basis

In order to calculate what you owe to the IRS if you sell your collectibles, start with your basis. Your basis typically equals the amount you paid for your collectibles, plus any auction or broker fees incurred during your purchase. If you spent money to refurbish, restore or maintain collectibles while you owned them, you can also add that to your basis.

Then, subtract your basis from the sale price of your collectibles; the amount left over is what is taxed. Here’s an example:

Ima Dahl decides to sell an 1898 German Bisque porcelain doll from her collection. She’s owned the doll for ten years and originally paid $700 for it. She also paid $150 two years ago to repair its cracked finish. She receives $1,800 by selling it at an online auction and spends $100 paying her auction fees and shipping to the new owner. Since she owned the doll for more than one year, her long-term capital gain is $850 and her potential maximum tax is $238. The calculation: $1,800 net sales price, minus the $700 basis, minus $150 for repairs, minus $100 selling expense multiplied by 28%.

Some collectible hints

Bullet Point Know the market value. If you inherit a collectible you will need to know the value of the object on the date you obtain it. This will usually become your basis when you sell it.
Bullet Point Investment or personal use. If your collectible is an investment you can usually take a loss on the sale of the collectible. Unfortunately, if the IRS deems the collectible has an element of personal use, you may not deduct the loss. An example of personal use may be the hanging of a painting on your wall. Being careful how you sell your collectible can also make a difference in managing your potential tax liability.
Bullet Point Collectibles tax rate good or bad. The 28 percent capital gain tax on collectibles is the maximum tax rate. For example, if you are in the 15 percent income tax range, your collectible gain is taxed at that rate. If your income tax bracket is higher than 28 percent, the collectibles tax rate is capped at 28 percent, resulting in a potentially lower tax rate versus ordinary income taxes.

As you can imagine, the taxes on buying and selling collectibles can be complex. If you are considering selling a potentially valuable item, ask for assistance.

Use Your Tax Refund Wisely

Roth BasicsThree of every four Americans got a refund check last year and the average amount was $2,777, according to IRS statistics. Because the amount of a refund is often uncertain, we may be tempted to spend it without too much planning. One way to counteract this natural tendency is to come up with a plan beforehand to spend your refund purposefully. Here are some ideas:

4 Pay off debt. If you have debt other than your home mortgage, a great spending priority can be to reduce or eliminate it. The longer you hold debt, the more the cumulative interest burden weighs on your future plans. You have to work harder for longer just to counteract the effect of the debt on your financial health. Start by paying down debts with the highest interest rates and work your way down the list until you bring your debt burden down to a manageable level.
2 Save for retirement. Saving for retirement works like debt, but in reverse. The longer you set aside money for retirement, the more time you give the power of compound earnings to work for you. This money can even continue working for you long after you retire. Consider depositing some or all of your refund check into a Traditional or Roth IRA. You can contribute a total of $5,500 to an IRA every year, or $6,500 if you’re 50 years old or older.
3 Save for a home. Home ownership is a source of wealth and stability for many Americans. If you don’t own a home yet, consider building up a down payment fund using some of your refund. If you already own a home, consider using your refund to start paying your mortgage off early.
4 Invest in yourself. Sometimes the best investment isn’t financial, but personal. If there’s a course of study or conference that would improve your skills or knowledge, that could be a wise use of your money in the long run.
5 Give some of it away. Helping people, and being able to deduct gifts and charity from your next tax return, isn’t the only benefit of giving to a good cause. Research shows that it makes us feel good on a neurological level. In fact, donating money activates our brains’ pleasure centers more than receiving the equivalent amount.1

If a refund is in your future, start planning now on how it can best help your financial situation.

When Converting to a Roth Makes Sense

Roth Basics

Virtually anyone with a qualified retirement savings account can convert funds into a Roth IRA. A Roth is different from other retirement accounts in that contributions come from after-tax dollars, while earnings are tax-free. The question for taxpayers with funds in tax-deferred Traditional IRAs, SEP-IRAs, 401(k)s, and 403(b)s is whether converting them into a Roth is worth it.

Roth Basics…

 

 

Major benefits of a Roth IRA:

Thumbs Up Earnings are free from federal tax. This can be of tremendous benefit if you are in a high tax bracket during retirement.
Thumbs Up Unlike Traditional IRAs, you can keep contributing to a Roth after age 70½.
Thumbs Up Unlike Traditional IRAs, there are no minimum required distribution rules.

Downsides of a Roth IRA:

Thumbs Down Because initial contributions are made with after-tax funds, you must pay income tax on the amounts converted from other retirement funds.
Thumbs Down If the tax paid during the conversion is taken from your retirement funds, you could be subject to a 10% early withdrawal penalty.

Things to consider

Prior to making the decision to convert funds into a Roth IRA, consider the following:

Arrow You should have enough money outside of your retirement account to pay the tax on the conversion.
Arrow A Roth makes the most sense if you think you will face higher tax rates when you retire.
Arrow A Roth conversion will increase your reported annual income by the amount converted during the year. If you aren’t careful, this could disqualify you for important tax benefits, such as dependent child and college tuition tax credits.
Arrow A Roth needs time to build tax-free earnings. The more time you have before retirement, the more a Roth makes sense.

It is important to understand your options, so remember to ask for assistance prior to making a Roth conversion.

Tick Tock. Tax Reduction Ideas Still Available

Tax MazeAs the end of the year approaches, there is still time to make moves to manage your tax liability. Here are some ideas to consider.

 

Icon Maximize your retirement plan contributions. This includes traditional IRAs, Roth IRAs, and SEP IRAs for self-employed. Given the contribution limits in 2017 are not increasing, now is the time to maximize the contribution potential for this year and plan for next year’s contributions.
Icon Estimate your current and next year taxable income. With this estimate you can determine which year receives the greatest benefit from a reduction in income. By understanding what the tax rate will be for your next dollar earned, you can understand the tax benefit of reducing income in this year versus next year.
Icon Make charitable contributions. Consider which tax year will benefit most from your charitable giving of cash and non-cash items. Shift your giving into the year that will provide you the most benefit.
Icon Take capital losses. Each year you can net capital losses against capital gains. You can also deduct up to $3,000 in excess losses against your other income. Start to identify which investments may make sense to sell to take advantage of this. If planned correctly, these losses can offset ordinary income.
Icon Consider donating appreciated stock. This strategy gives you a charitable deduction for the market value of the stock, while not having to pay capital gains tax on the charitable gift. If you provide an annual pledge sheet to your church, this can be a great way to maximize your gift while giving needed funds to your church at the beginning of the year.
Icon Standard or itemized deductions. The standard deduction for 2016 is $12,600 for joint filers and $6,300 for single filers. If your itemized deductions are close to these amounts, consider shifting the deductions into next year. You can then maximize the benefit of itemizing into one tax year.
Icon Retirement plan distributions. If you are age 70½ or older, take your required minimum distributions for the year. If you are retired, but younger than 70½, consider taking tax efficient distributions from your retirement accounts. By paying some tax now, you may avoid paying higher taxes later when you have to follow the minimum distribution rules.
Icon Consider tax legislation. Please recall that tax laws passed in late 2015 made many temporary tax savings permanent and extended others into 2016. So save classroom related receipts if you are a teacher. Consider charitable contributions from your retirement plan if you are a senior. Keep receipts of large purchases to track a potential sales tax deduction.

As always, should you have any questions or concerns regarding your situation please feel free to call.

Breaking News: 2017 Retirement Contribution & Social Security Limits

If you have not already done so, now is the time to plan for contributions into your retirement accounts in 2017.

Retirement Contribution Limits

Retirement Program 2017 2016 Change Age 50 or over catch up
IRA: Traditional $5,500 $5,500 none add: $1,000
IRA: Roth $5,500 $5,500 none add: $1,000
IRA: SIMPLE $12,500 $12,500 none add: $3,000
401(k), 403(b), 457 plans $18,000 $18,000 none add: $6,000

Social Security

Item 2017 2016 Change Comment
Wages Subject to Social Security $127,200 $118,500 +$8,700 Annual Social Security employee tax: $7,886.40
Average Estimated Monthly Retirement Benefit $1,360 $1,355 +$5 Change in estimated amount

Don’t forget to account for any matching programs offered by your employer as you determine your various funding levels for next year.

Charitable Donations from Your IRA

Charitable Donations from Your IRA

Can you take advantage?

One of the temporary tax provisions made permanent as part of the tax code in late 2015 is qualified charitable distributions from IRAs for those who have reached age 70½. Unfortunately in 2014 and 2015, the law was extended too late during the calendar year to reasonably use this tax law. In 2016 you have the ability to make a planned decision to use this tax benefit. Here is what you need to know.

The rule. For those age 70½ or older, you can have up to $100,000 of your IRA paid directly to qualified tax-exempt charities each year. These pre-tax funds are not subject to income tax by the federal government. This makes the contribution income tax free. No itemized deduction for your contributions is available on these direct transfers.

The benefits

Bullet Item Taxpayers do not have the contributions from their retirement accounts added to their Adjusted Gross Income. So as a planning tool, this donation strategy can keep Adjusted Gross Income low. This can help avoid things that come with higher income levels like different Medicare premiums.
Bullet Item The contribution counts towards a taxpayer’s annual Required Minimum Distribution. If a taxpayer does not need the income and does not want to be subject to required minimum distribution penalties, this can be a great alternative.
Bullet Item The contribution is a straight write off. Remember, these funds are sitting in your IRA in pre-tax status. When they are normally withdrawn, the funds are subject to income tax. This tax feature allows you the charitable deduction without the hassle of itemizing your deductions.

Some cautions

As with all tax laws, you must be aware of the rules. Foremost among them are;

Bullet Item The contribution must be made directly between your account and the charity.
Bullet Item This benefit is on the federal level. The tax treatment in your home state will vary.
Bullet Item Since the donation does not go through the taxpayer’s income, the donation is not subject to the percentage of income limits on charitable giving by type of organization.
Bullet Item Don’t wait. Since it usually takes time to initiate and complete this transfer, do not wait until the end of the year to make your direct contribution. The money must be at the charity prior to January 1st.

While this tax opportunity is not right for everyone, it is a new tool to use when creating your annual tax plan.

Time to Consider a Roth?

1040 form and IRS logoWith interest rates close to zero and a newly received refund check in hand, you may wish to consider a contribution to a Roth IRA.

The Roth IRA basics

Using after-tax funds, you can contribute up to $5,500 each year in a Roth IRA. If you are at least 50 years old, you can contribute an additional $1,000. As long as your Roth IRA has been open for 5 years or more and your withdrawal of earnings occurs after 59½ years old, any earnings you receive from this account are yours tax-free.

1 Tax-free earnings. Unlike other retirement accounts, Roth IRA earnings are not taxed by the Federal government when withdrawn.
2 Keep contributing. Most other retirement accounts have a contribution age limit of 70½. When you reach this age you not only need to stop contributing to the account, but you are required to make a minimum withdrawal from the account each year. These limits do not exist for Roth IRA accountholders.
3 You can withdraw your contributions. Remember with a Roth IRA, your contributions were already taxed. So there is no penalty for withdrawing these funds. Just remember there can be a penalty for withdrawing any earnings before you reach age 59½ or before having the account for five years.

There are limits

If you earn more than $132,000 (single) or $194,000 (married filing joint) you are not allowed to make a Roth Contribution in 2016. You can, however, convert funds from a traditional IRA without these income limitations.

There is Still Time for Retirement Funding

Financial papers

There is still time to make a contribution to a Traditional IRA or Roth IRA for the 2015 tax year. The annual contribution limit is $5,500 or $6,500 if you are age 50 or over. Prior to making the contribution, if you (or your spouse) are an active participant in an employer’s qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain thresholds. There are also income limits to qualify to make Roth IRA contributions. The limits are outlined here.

2015 IRA Contribution limit: $5,500 or $6,500 (with age 50+ catch up provision)

2015 IRA Income (MAGI) Limits
Filing
Status
Traditional IRA
allowed contribution range
Roth IRA
allowed contribution range
Full
contribution
Phase-out
complete
Full
contribution
Phase-out
complete
SINGLE $61,000 $71,000 $116,000 $131,000
MARRIED
$98,000
both participating
$118,000
both participating
$183,000 $193,000
$183,000
spouse participating
$193,000
spouse participating
Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer-provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phase-out to contribute is $0 – $10,000.

A final thought

If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA. While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.