Insights: The C&J Blog
We offer clients educational insights that help them make sense of the current market & economic environment. Each monthly investment letter is written by our investment analyst and contains candid insight and perspective that facilitates a clearer and deeper understanding of our views. Alongside our monthly investment letters, we also maintain a blog that touches on a variety of topics relating to financial planning and investing. If there is a question or topic on your mind that you’d like for us to discuss in a future investment letter, feel free to let us know at firstname.lastname@example.org.
IRAs to help children is a wise financial decision.
Can children have IRAs? There is no minimum age for having an IRA. Due to the power of compound interest, saving tax-free in an IRA from childhood on can provide a huge head start on financial security. Saving $5,500 in an IRA annually from age 14 through 24 and earning 7% per year provides $1.06 million at age 61—even without contributing after age 24!
1. Open an IRA for every child who has earned income. The yearly contribution limit is $5,500 or the amount of the child’s earned income, whichever is less. Any kind of paying work will do: babysitting, waiting tables, and so on. Wages can come from a family business. Note: for a minor child (under age 18 to 21, depending on state law), you will need to set up a “guardian IRA” account. These are offered by many banks and financial institutions.
When it comes time to rollover your employer 401(k), what are your best options? Most think the best solution is to rollover your plan to an IRA. Here are six options to evaluate before making a decision. These are available to plans with employees – not all options will apply to sole proprietor plans. Most options will not apply to SEP and SIMPLE plan participants.
1. Rollover to an IRA. There are a lot of benefits to this option. Rolling over to an IRA is a tax-free transaction when a direct rollover is used to move the funds. IRAs have more investment choices and are more flexible when it comes to distributions and financial planning. You generally get better service from your advisors than you will get from the 800 number for the plan.
SIMPLE IRAs are popular retirement vehicles for small businesses. They are relatively cheap to adopt and are easy to understand and administer. However, that doesn’t mean problems do not arise. Routinely, we see issues involving ineligible plan sponsors, missed contributions, and late deposits. If you are thinking about adopting a SIMPLE IRA for your small business, it is essential that you understand the rules.
Establishing a SIMPLE IRA is simple enough. You execute a written agreement with a custodian that can either be a prototype plan, a Form 5304-SIMPLE, or a Form 5305-SIMPLE. You could also use an individually designed plan that meets the tax code requirements, but that is rare. Each eligible employee should receive a Summary Plan Description that not only complies with the IRS rules, but meets the Department of Labor standards under the Employee Retirement Income Security Act.
IRA owners can clearly combine the accounts they own and they can combine the required minimum distributions (RMDs) from multiple IRAs and take them from any one or combination of their IRAs. The rules for combining Inherited IRAs and RMDs are more complex.
An IRA owner cannot combine IRAs they own with IRAs that they have inherited, unless the inherited IRA came from their current spouse. IRAs that are inherited from the same person can be combined, as long as the RMD calculation is done in the manner for all of the inherited IRA accounts. Generally, this is easy. If Dad had two IRA accounts and you inherit half of each of those accounts because you are named on the beneficiary forms for those accounts, then you can combine them. If you keep the accounts separate, you can calculate the RMD on each account and then combine it and take all or any part of the RMD from either account as long as you take the full RMD.
When it’s time to consider signing up for Social Security, turn to your financial advisor for advice and recommendations. Social Security is challenging with numerous complex rules that are confusing. Recent changes have added to the difficulty in how to correctly interpret the law’s meanings and how choices can impact you long-term. Often, those who are relying on Social Security Administration (SSA) assistance, find their recommendations are not the best choices for their unique situation. Read on for tips on claiming Social Security.
The Social Security Administration has received criticism. The U.S. Senate Special Committee on Aging urged the SSA to improve the recommendations it provides to individuals. Their concern was based on a U.S. Government Accountability Office (GAO) report that emphasized inconsistencies in the recommendations that the SSA and its claims personnel were giving to people applying for benefits.
October 15 is the Deadline to Recharacterize 2017 IRA Contributions and Conversions
IRA recharacterization is a tax-free transfer of funds from one kind of IRA to another. If you converted a traditional IRA to a Roth IRA and now are reconsidering, recharacterization allows you to undo the transaction and move the funds back to a traditional IRA. You can also recharacterize a tax-year traditional IRA contribution from a traditional IRA to a Roth IRA or vice versa. The Tax Cuts and Jobs Act does away with recharacterization for conversions done in 2018 and later, but the IRS has made it clear that 2017 conversions can still be recharacterized. Don’t miss out on this last chance to take advantage of one of the rare opportunities for a “do-over” in the tax code.
You may consider recharacterizing your 2017 conversion for many reasons. You might be having second thoughts about the tax bill. Tax reform has resulted in lower tax rates in 2018 for many taxpayers. Maybe you converted in 2017 when your rates were higher and now you would like a “do-over” at lower 2018 rates. You have the option of recharacterizing your 2017 conversion.
We constantly see questions regarding the distribution rules for Roth IRAs. Personally, I’ve always thought that the failure to understand these rules prevents many from truly appreciating the benefits of these accounts. Traditional IRAs are easy. Unless we are talking about nondeductible contributions, the money is deductible when contributed and taxable upon withdrawal. There’s also the early distribution penalty that could apply depending on the circumstances.
Roth IRAs have a couple of different rules, including two separate 5-year rules. The easiest way to understand these rules is to remember that a Roth IRA consists of two parts: (1) contributions/conversions and (2) investment gains/losses. This is important because contributions can always be withdrawn at any time, tax and penalty free. The earnings, however, are potentially taxable and could be hit with the early distribution penalty.
5 Easy steps to fix a missed 60-day rollover deadline with Self-Certification.
If I miss the 60-day deadline for completing an IRA rollover, is there any way to save the rollover amount from tax?
Failing to complete a 60-day rollover on time can cause the rollover amount to be taxed as income and perhaps subject to a 10% early withdrawal penalty. However, the deadline may have been missed due to reasons that are not the taxpayer’s fault. For such cases, the IRS has created an easy, low-cost way to fix late rollover errors. Revenue Procedure 2016-47 enables individuals to self-certify that they are eligible for a waiver of the 60-day deadline and complete a late rollover.
1. Double check the status of every rollover you attempt. Don’t assume one has been completed just because you did your part. Mistakes happen. You can’t correct a mistake you don’t know about, and a delay hurts your case with the IRS.
Time is ticking by! Here are important retirement account deadlines you don’t want to miss.
• Recharacterize 2017 Roth IRA Conversions
Did you convert a traditional IRA to a Roth IRA in 2017? If you think you may want to recharacterize your account(s), don’t let October 15 slip by.
If your account has declined in value, a recharacterization might make sense. You may also consider recharacterizing 2017 conversion and reconverting in 2018 to take advantage of lower tax rates put in place by the Tax Cuts and Jobs Act (TCJA).
TCJA eliminates recharacterization for Roth conversions done in 2018 or later. Clients who converted in 2017 are the last ones who will be able to take advantage of this rare opportunity in the tax code. Don’t miss out by missing the deadline!
Understanding the difference between IRA & Designated Beneficiaries
IRAs have beneficiaries and “designated beneficiaries,” and it is important to know the difference. If you wish your heirs to have the opportunity to take full advantage of “stretch” IRAs, and to avoid other possibly costly mistakes, be sure your heirs are designated beneficiaries. Here’s the difference and why it matters.
The beneficiary that inherits an IRA can be an individual or a legal entity such as a charity or an estate. But a designated beneficiary must be a living person ‘with a pulse’ who is named on the beneficiary form of the IRA.
The major advantages of a designated beneficiary are:
Distributions from inherited IRAs can be stretched over a designated beneficiary’s lifetime, possibly allowing decades of tax-favored investment returns to be earned in the IRA.
The IRA passes directly to a designated beneficiary, escaping complications like probate.