Many people believe a Last Will and Testament is sufficient to meet their estate planning goals.
If their goal is making the fulfillment of their wishes as easy as possible for their family and friends, with the least amount of expense, they might consider a Revocable Living Trust.
A Revocable Living Trust is a legal document that acts similarly to a Will, but does much more.
It seems every local paper, financial network, or informative media source is reporting about the historically low interest rates, the fear of near zero or negative interest rates, and the discussion of economic growth because of these conditions. What does this really mean and more importantly, what does it mean to you?
Ed. Note: This article first appeared in CNBC
The April 18 tax-filing deadline is looming, and many corporate executives, attorneys and other professionals earning high salaries are seeking to save more money and cut their taxes.
There is a great strategy that they could be overlooking that may save significant taxes in retirement: setting up a Roth Individual Retirement Account.
Roth IRAs are attractive for several reasons.
While funded with after-tax dollars, any earnings are tax-deferred and withdrawals in retirement are tax-free.
Additionally, Roth IRAs are not subject to the minimum annual withdrawals required from traditional IRAs during retirement, so they can also be an excellent tax-planning tool.
So you’ve inherited your spouse’s IRA. What you do now could have far-reaching tax implications. The one thing you cannot do is sit on your hands. Why? Because if you fail to withdraw at least the required minimum amount from your inherited IRA, you will be charged a penalty equal to 50% of the shortfall. This is one of the toughest penalties in our beloved Internal Revenue Code. So please pay attention and read on to learn how to calculate required minimum withdrawals from an IRA you inherited from your spouse.
Making sure the income you will count on from your retirement savings is sustainable is one of the most important steps people should take. And one common method that people have used for the past 25 years or so is the “4% rule.” However, some question whether the 4% rule is still useful.
We reached out to three of our experts on retirement planning and asked for their latest thoughts on the 4% rule and whether it’s still worthy advice. Here’s what they had to say.
If you’ve been considering a Roth IRA as part of your retirement investment portfolio, now’s the time to start one.
With tax-free growth and tax-free withdrawal opportunities, Roth IRAs provide the investment flexibility to help you achieve both retirement goals and other financial goals.
Here’s more on why a Roth should be part of your retirement investment mix:
By law, money received by a taxpayer from an IRA, 401(k), or other workplace retirement plan, must be contributed (i.e. rolled over) to another retirement account within 60 days to escape immediate taxation. Otherwise, it is considered a distribution subject to regular taxes and (if you’re under 59 ½), apossible 10% early withdrawal penalty. That 60 day rule tripped up so many taxpayers, that in 2001 Congress gave the IRS the ability to waive it, if the delay wasn’t a taxpayer’s fault —for example, his house was destroyed, or a financial advisor gave him bum advice about the time he had to do the rollover.
Until today, however, to get 60 day relief, you had to apply to the IRS for what’s known as a private letter ruling. That meant paying the IRS a stiff fee (which rose on January 1, 2016 to a stunning $10,000), plus shelling out another $5,000 to $10,000 for a tax pro to prepare the private letter ruling request. The ruling took six to nine months, and you couldn’t roll the money into a new account until the IRS gave the green light. Even worse, Slott says, a lot of people didn’t even know the letter ruling was an option, and ended up paying a whopping tax bill on their retirement savings and losing potentially decades of tax deferral, because of an innocent mistake.
But in Revenue Procedure 2016-47, both issued and effective today, the IRS has created a new “self-certification” procedure that allows someone who misses the 60 day deadline to avoid the expense and delay of obtaining a private letter ruling. Instead, a taxpayer submits a model IRS letter to the new retirement account custodian, checking in that letter one of 11 acceptable excuses for missing the deadline. This isn’t an unconditional pass—the IRA custodian will report the letter to the IRS and should the taxpayer be audited, the IRS can still determine he didn’t quality for 60 day relief.
But the 11 excuses are pretty inclusive and cover most of the reasons that the IRS has granted private letter relief for in the past. They include an error by a financial institution; a taxpayer misplacing (and never cashing) the retirement account distribution check; and a taxpayer mistakenly putting the check in a taxable account he thought was an eligible retirement account. There’s also lots of dispensation for personal problems, including a death or serious illness in the family; a home being severely damaged; and even a taxpayer being unable to complete the rollover because he was incarcerated.
One catch is that the taxpayer must usually complete the late rollover within 30 days after the circumstance which kept him from making a more timely rollover is discovered or ends. “One of these reasons is because a family member dies. Who’s to say when the 30 days starts? When do you finish grieving?’’ Slott asked. “It’s a little ambiguous. I would get it done as soon as possible,” he added.
While the reasons are broad, they only apply if you were eligible to do a 60 day rollover to begin with. That’s a crucial point, because, as a result of a 2014 U.S. Tax Court decision, taxpayers may only do one 60 day IRA rollover every 12 months, no matter how many IRAs they have. (Before that, you could do one rollover a year for each IRA.)
The safest way to move money from one retirement account to another is to have one trustee (that would be the bank, broker, mutual fund or other financial firm that holds your account) transfer it directly to another trustee. You can do that as many times a year as you want and run no risk of missing the 60 day deadline. In announcing the new self-certification procedure, the IRS urged taxpayers to consider such direct trustee-to-trustee transfers.
Note that IRAs inherited from anyone other than a spouse never qualify for 60 day rollovers; they can be moved only from trustee to trustee and must be carefully retitled as an “inherited IRA” —e.g. “John X. Smith II, deceased, inherited IRA for the benefit of John X Smith III.”
In addition, 401(k) money is almost always best transferred directly from custodian to custodian. That’s because if you take a distribution from your 401(k), your employer must withhold 20% for taxes, meaning you won’t have the full amount to put into the new account unless you can come up with it from your other savings.
Warning: one excuse the IRS won’t allow is that you were using your retirement money as a short term loan for some non-retirement purpose—say, a down payment on a house—and missed the 60 day deadline because of a snag. In its private letter rulings, the IRS has shown little mercy to taxpayers in such situations.
Some workers may be too old to contribute to a traditional IRA.
By Kimberly Lankford, August 19, 2016
I’m 72 years old and earn some money as a self-employed consultant. Can I contribute to an IRA and, if so, how much?
You can’t contribute to a traditional IRA starting in the year you turn 70½. But you can contribute to a Roth IRA at any age, and the money can grow tax-free in the account indefinitely (you don’t have to take required minimum distributions). To qualify for a Roth, your income in 2016 must be less than $132,000 if you’re single or $194,000 if you’re married and file taxes jointly.
You can contribute up to the amount you earned for the year (your net income from self-employment), with a maximum of $6,500 ($5,500 plus $1,000 for people age 50 and older). If your earnings are well over the $6,500 max, you can simply contribute that amount, but if they are close to or under the maximum, you’ll need to know what is considered compensation and how to calculate your allowed contribution. For that information, see IRS Publication 590, Individual Retirement Arrangements.
Or, because you are self-employed, you can contribute to a solo 401(k), says Rande Spiegelman, vice president of financial planning with the Schwab Center for Financial Research. You can deduct your contribution now and defer taxes on the money until it’s withdrawn. But because you’re over age 70½, you must take required minimum distributions from the solo 401(k). Employees usually don’t have to take RMDs from their current employer’s 401(k) if they’re still working at age 70½, but that rule doesn’t apply if you own 5% or more of the company. Because you’re self-employed and own the whole company, you’re stuck taking the RMDs.