Tag Archives for " legacy planning "

Jan 23

How does the SECURE Act affect you?

By Chris Chen CFP | Financial Planning , Retirement Planning , Tax Planning

After several months of uncertainty, Congress finally passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act in December 2019, with President Trump signing the new Act into law on December 20, 2019. The SECURE Act introduces some of the most significant changes in retirement planning in more than a decade.

The SECURE Act makes several changes to the Internal Revenue Code (IRC) as well as the Employee Retirement Income Security Act (ERISA) that are intended to expand retirement plan coverage for workers and increase savings opportunities. The SECURE Act also radically changes several techniques used for retirement and tax planning. 

Some of the key provisions affecting employer retirement plans, individual retirement accounts (IRAs), and Section 529 Plans included in the SECURE Act are as follows.

IRA Contributions

Starting in 2020, eligible taxpayers can now make Traditional IRA contributions at any age. They are no longer bound by the previous limit of age 70 ½ for contributing to a Traditional IRA.  As a result, individuals 70 ½ and older are now eligible for the back-door Roth IRA .

As an aside, anyone who satisfies the income threshold and has compensation can fund a Roth IRA.

In addition, graduate students are now able to treat taxable stipends and non-tuition fellowship payments as earned income for IRA contribution purposes . I have a graduate student, so I understand that their stipend income may not allow them to contribute to retirement. However, that is something that forward-thinking parents and grandparents can consider as part of their own estate planning.

Required Minimum Distributions

As our retirement age seems to push into the future steadily, so are Required Minimum Distributions under the SECURE Act. This provision, which applies to IRAs and other qualified retirement plans (401(k), 403(b), and 457(b)) allows retirees turning 70 ½ in 2020 or later to delay RMDs from 70 ½ years of age to April 1 of the year after a retiree reaches age 72 . In addition, the law allows people who own certain plans to delay it even further in the case that they are still working after 72. Unfortunately, the provision does not apply to those who have turned 70 ½ in 2019. Natalie Choate, an estate planning lawyer in Boston, says in Morningstar, “no IRA owner will have a beginning RMD date in 2021”.

This RMD provision is part of the good news in the SECURE Act. It will allow retirees more time to reach their retirement income goals. For many, it will enable better lifetime tax planning as well.

End of the “Stretch” IRA

Prior to the SECURE Act, the distributions on an inherited IRA could be “stretched” over the expected lifetime of the inheritor. That was a staple tool of estate and tax planning. 

No more. With a few exceptions, such as for the spouse, the “stretch” is now effectively crunched into ten years. Accounts inherited as of 12/31/2019 are now expected to be distributed over ten years, without a specific annual requirement.

The consequence of this provision of the Act is likely to result in larger tax bills for people inheriting . This makes planning for people who expect to leave IRAs, as well for inheriting them, more important than ever. 

Qualified Birth or Adoption Distribution

The new law allows a penalty-free distribution of up to $5,000 from an IRA or employer plan for a  “Qualified Birth or Adoption Distribution.” For a qualified distribution, the owner of the account must take the distribution for a one-year period starting on (1) the date of birth of the child or (2) the date when the adoption becomes final (individual must be under age 18). The law permits the IRA owner who took the distribution to pay it back to the plan or IRA at a later date. However, these distributions remain subject to income taxes.

Generally speaking, we at Insight Financial Strategists think that people in this situation should avoid availing themselves of this new wrinkle in the law. In our experience, a distribution from retirement accounts before retirement can have profound impacts on retirement income security. 

529 Plans

It may sound off-topic, but it is not. The SECURE Act also addresses 529 plans. For students and their parents, the SECURE ACT allows tax-free 529 plans to pay for apprenticeship programs if they are registered and certified by the Department of Labor.

This provision will be helpful for those people who have children headed to vocational track programs.

In a very partial solution to the student loan crisis, savings in 529 plans can now be used to pay down a qualified education loan, up to $10,000 for a lifetime . Technically, the law makes this provision effective as of the beginning of 2019. 

Given how students and parents scramble to meet the challenge of the cost of higher education, I do not forecast that most 529 plans have much left over to pay off loans!

Business Retirement Plans

(Part-Time) Employee Eligibility for 401(k) Plans – In most 401(k) plans, participation by part-time employees is limited. The SECURE Act enables long-time part-time workers to participate in 401(k) plans if they have worked for at least 500 hours in each of three consecutive 12-month periods. Long-term part-time employees who become eligible under this provision may still be excluded from eligibility for contributions by employers.

Delayed Adoption of Employer Funded Qualified Retirement Plan Beginning in 2020, a new plan would be treated as effective for the prior tax year if it is established later than the due date of the previous year’s tax return. Notably, this provision would only apply to plans that are entirely employer-funded (i.e., profit-sharing, pension, and stock bonus plans).

403(b) Custodial Accounts under Terminated Plans are allowed to be Distributed in Kind – Subject to US Treasury Department guidance, the SECURE Act allows an individual 403(b) custodial account in a terminating plan to be distributed “in-kind” to the participant. The account distributed in this way would retain its tax-deferred status as a 403(b). 

Establish Open Multiple Employer Plans (MEPs) – Employers may now join together to create an “open” MEPs, referred to in the legislation as “Pooled Plans.” This will allow small employers to join together and share the costs of retirement planning for their employees, such as through a local Chamber of Commerce or other organization, to start a retirement plan for their employees. 

Increased Tax Credits – The tax credit for small employers who start a new retirement plan will increase from $500 to $5,000. In addition, small employers that add automatic enrollment to their plans also may qualify for an additional $500 annual tax credit for up to three years.

There are many more provisions in the SECURE Act. While some of them are useful for taxpayers, it is worth noting the observation by Ed Slott, a tax expert and sometimes wag: “whatever Congress names a tax law, it does the opposite .”  This is worth keeping in mind as you mull the implications of this law. With the SECURE Act now the law, it may be time to check in with your fiduciary financial planner and revise your retirement income and estate plans.

Jun 25

What Is Your Legacy Plan?

By Chris Chen CFP | Financial Planning

What Is Your Legacy Plan?

While it may not be pleasant to think of one’s own passing, having your affairs in order can help ease the burden on friends and family, when the time comes, and can contribute to your own peace of mind knowing you have done all you can to prepare. There are many factors that should be considered when trying to create an effective and comprehensive legacy plan. Some considerations include:

  • Instructions on your own care in sickness
  • Guardians for your minor children should both parents pass
  • Protection from creditors
  • Charitable contributions
  • Continuation of a family business
  • Reducing or eliminating tax
  • Maintaining family harmony
  • Legacy creation and support of future generations

In addition, all these factors should integrate appropriately with your retirement income planning and your investment decisions.

Even if you already have a legacy plan in place, you may want to conduct a review. Decisions made years ago may not accurately reflect your current wishes. Legacy plans are not for the significantly wealthy alone. If you have children in your care or a business you wish to leave to future generations, it is important that protections and guidance are put in place now and are not put off until your retirement years. It is always a possibility that you may not have the luxury to last throughout the entire life expectancy table.

A poorly executed legacy plan, or the lack of one at all, could leave those you most care about to suffer needlessly in your absence. Be sure to work with a CFP™ professional or another experienced professional to gain control of your estate plan.

 

The preceding content was originally published on the Financial Planning Association © Web site, www.FPAnet.org

 


May 12

Marriage and Building Wealth: Finding a Happy Balance

By Chris Chen CFP | Financial Planning , Retirement Planning

Marriage and Building Wealth: Finding a Happy Balance

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. Here are some considerations to keep in mind if you are thinking of getting married or have just tied the knot.

Building wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans, your joint contributions are double the individual maximums ($17,500 for 2013). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which may make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax planning

When filing federal income taxes, filing jointly typically results in lower tax payments when compared with filing separately.

Debt management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved.

 

Mar 15

Are your affairs in order?

By Chris Chen CFP | Financial Planning

While it is not  pleasant to think of one’s own passing, having your affairs in order can help ease the burden on friends and family, when the time comes, and can contribute to your own peace of mind knowing that you have done all you can to prepare. There are many factors that should be considered when trying to create an effective and comprehensive estate plan. Some considerations include:

  • Instructions on your own care in sickness
  • Guardians for your minor children should both parents pass
  • Protection from creditors
  • Charitable contributions
  • Continuation of a family business
  • Reducing or eliminating tax
  • Maintaining family harmony
  • Legacy creation and support of future generations

In addition, all these factors should integrate appropriately with your retirement income planning and your investment decisions.

Even if you already have an estate plan in place, you may want to conduct a review. Decisions made years ago may not accurately reflect your current wishes. Estate plans are not for the significantly wealthy alone. If you have children in your care or a business you wish to leave to future generations, it is important that protections and guidance are put in place now and are not put off until your retirement years. It is always a possibility that you may not have the luxury to wait so long.

A poorly executed estate plan, or the lack of one at all, could leave those you most care about suffering needlessly in your absence.  Get ready today to gain control of your estate plan!