Rethinking Retirement Age

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The age at which we retire has traditionally been linked to cultural norms and external factors such as the availability of a company pension, health care and Social Security retirement benefits. Pensions were designed to incentivize long-service with a single employer while also establishing formulas that would provide reliable incentives for employees to eventually retire. While there has been a dramatic shift from a manufacturing economy to one based on the delivery of goods and services, the decision to retire based on attaining a set age remains stubbornly persistent. As the self-funded and self-managed retirement replaces traditional lifetime pensions, fresh thinking has emerged on how to manage the risk of outliving one’s assets. Rethinking retirement as a ratio of working years to leisure years is beginning to gain acceptance as a more thoughtful way of addressing this and other retirement risks.

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Last Minute Tax Tip: How Entrepreneurs can get BIG Tax Breaks through Retirement Savings

With Tax Day in 2 weeks, you might be wondering whether there are any last minute things you can do to save on taxes from latax-dayst year’s income.  Good news: if you’re an entrepreneur, there is!

Did you know that if you’re self-employed or a small business owner there is a special type of pension plan available for you (and your employees)?  Available for businesses of any size, a simplified employee pension plan (SEP-IRA)is a written arrangement that allows a self-employed individual or a business owner to contribute to a pension plan with significantly higher limits than a traditional IRA.

A self-employed individual can contribute (pre-tax!) between 0-25% of their compensation (maximum contributions up to $51,000 for 2013, $52,000 for 2014); here’s the small catch: each eligible employee has to get the same percentage.

There are distinct advantages to setting up a plan like this:

  1.      You can contribute more (up to $51,000) to a plan like this than the traditional IRA maximum annual contribution of $5,500
  2.      The contribution is tax deductible
  3.      The account grows tax deferred until you withdraw the money
  4.      There are no annual reporting requirements for SEPs as long as each participant or individual who is in the plan receives a copy of the plan agreement and disclosure form (this is unlike a traditional 401K, defined contribution plan, or defined benefit plan, which have an annual 5500 form filing requirement)

In order to deduct the contribution, you must establish the plan by April 15th and contribute to the plan by April 15th (or the due date of your return including extensions – check with your accountant).

There are very few drawbacks to setting one of these plans up.

How to set up a SEP-IRA:

SEP-IRAss can be set up through a financial advisor, through a brokerage house, or through a bank.

Participants are eligible to sign up for a wide variety of investment opportunities including mutual funds, stocks, bonds, ETFs, and many more.

There should be no establishment fees to launch the plan and annual fees are minimal.

This great way anyone who is self-employed who has a profit to shelter some of that income from taxation.   We recommend using this worksheet to figure out your savings or, as always, contact us.

Secrets to Claiming a Home Office Tax Deduction

Over 25 Million Americans work from home, but only 3.4 Million claim the home office Home-Office-Workspace-Furniture-White-Simplededuction.  Whether you’re a homeowner or a home-renter, if you work at home or use your home for business at all, you may be eligible to claim a home-office deduction this tax season.

There are some new home-office deduction rules that apply. But before we dive into those, let’s go over the requirements for claiming the tax deduction.

If you use your home for business, in order to claim a home-office deduction, the home–office:

1. Has to be used regularly and exclusively for business

2. Has to be your principal place for business

What do these two requirements mean?

1. Has to be used regularly and exclusively for business. You must use the area on a regular basis as your place for doing business and the area must be used exclusively for that business.  It doesn’t need to be an entire room, but it does need to be an area that has clear boundaries (for example, the desk set-up in the corner of a room).  Merely working at your kitchen table filing paperwork because you couldn’t get all your work finished in the office does not qualify.

2. Has to be your principal place for business.  The rule of thumb here is that no substantial portion of your business is carried out in another fixed location (i.e. office).  If you’re having face-to-face meetings at home or use it for the administrative portion of your business, even if you carry out business elsewhere, you can still qualify for the deduction for that room that is regularly and exclusively for business (for example with a carpenter or an interior designer who spends most of their time in other people’s homes).

  • If you have a separate, freestanding building – a studio, barn, garage behind your house, that too, can qualify.
  • For Freelancers:  You may have a full-time job at an office, but freelance on the side (writer, blogger, entrepreneur).  Good news: you can still qualify for their business as long as it is regularly and exclusively for business and used as your principal place of that business.
  • If you are an employee and you use part of your home for business, you also may qualify for a deduction, but, in addition to the two tests above, you also have to prove that: 1) it is for the convenience of the employer (there are no hard and fast rules for that) and 2) you must not rent any part of your home to the employer and use the rented portion to perform services as an employee for that employer

There are 2 methods for calculating the home-office deduction.

1. Simplified method.  Effective, January 1, 2013, this is a new simplified option (outlined methodology in detail in IRS Revenue procedure 2013-13) which significantly reduces the record keeping burden by allowing you to multiply a proscribed rate by a percentage of square footage used by the home-office.  The proscribed rate is $5 per square foot for a maximum of 300 square feet or $1500 dollar of tax savings.

2. Regular method. This method has been around for many years, whereby you must determine the actual expenses for your home office.  The expenses that can be allocated towards home office use can include things such as insurance, light, heat, power, repairs, depreciation, real estate taxes, and mortgage interest.

We suggesting calculating both ways to see which method will result in a bigger deduction.

For more information, call us.

Disability Insurance (Part 2): The 9 Things You Need to Know Before Buying Disability Insurance

Most people don’t have sufficient disability coverage. 

Disability insurance is a contract between you and the insurance company that will replace your wages when you become sick or injured and cannot work for a long time.

According to the Social Security Administration, nearly 1 in 4 of today’s twenty year-olds will become disabled before age 67.  Most people think that Social Security will provide the benefits that they need, but often that is not the case:

  1. Social Security does not provide a person’s full wages as benefits.
  2. Social Security has a very strict definition of what “disability” is and is not.
  3. Social Security has a 5-month waiting period before you can receive any of the benefits.  Even in the face of medical costs that are associated with disability income, it means forgoing income for 5 months.

Social Security should only be used as a supplement to your own long-term disability policy.

Many employers offer disability coverage as an additional fringe benefit, but as we mentioned in Part 1 of our posts on the topic, employer coverage only covers you while you’re working there and become disabled while you’re working there.  Additionally, most group plans do not typically cover more than 60% of your salary.  It is not portable.  If you lose your job, your next employer may or may not have a long-term disability plan.  Unlike health insurance where you can get coverage under COBRA for a period of time, once you leave your employer’s plan, you no longer have any coverage as a safety net.

To the extent you have employer coverage, if you are applying for personal, the insurance company will take that into account and decrease your benefit accordingly.

Q: How much disability should you obtain?

A: At least 80% of your before tax earnings. 

When choosing a long-term disability insurance plan, these are some aspects of the fine print about which to ask:

  1. Check the definition of ‘disability’ (there are 3 potential options)
    1. Own occupation: this is the best definition of disability because it is the most broad. Under this definition, an insured person is considered entirely disabled if he is unable to do any or every duty of his occupation.  For example, if you can get a job in a different industry, you can still collect benefits under this policy.
    2. Any occupation: this is the strictest definition of disability. Under this definition, an insured person is considered disabled only when he is unable to do every duty for which he is trained.
    3. Split definition: frequently used by insurance companies, this is some sort of combination of the two previous definitions.
  2. Make sure that your contract is NonCancelable and Guaranteed Renewable. This guarantees that after you place a policy in-force that there will be no changes to your premium schedule, your monthly benefits, or your policy benefit. No one can guarantee that their incomes will never go down, under a Non-Cancelable policy even if your income goes down later in life, if you become totally disabled the insurance company will pay you the total disability benefit you originally placed in-force. Under a Non-Cancelable policy for example, if you changed jobs from being professional worker (a low-risk occupation) to a professional weight lifter the company could not change your benefits for the worse.
  3. Ensure that your monthly benefit coverage replaces between 50-80% of your pre-disability income.
  4. Make sure you get a cost of living rider, which is an inflation hedge for your benefits.
  5. Ask for a FIO (future increase option), which allows you to increase your insurance benefits as income rises, regardless of health. Without this rider, there is no way to protect your future earnings. A disability insurance policy by itself only protects the amount of income that you make at the time when you take out the policy. It does not grow automatically unless you have this.
  6. Check that the policy eliminates any requirement for you to pay any premium payments while you’re disabled.
  7. Ask about a residual benefits clause, which is a partial payout due to partial disability.  For example, receiving partial benefits if you’re only able to work part-time.
  8.  Evaluate and choosing the waiting period or elimination period as its sometimes known as.  The elimination period is the period of time between the onset of a disability, and the time you are eligible for benefits. It is best thought of as a deductible period for your policy. The most common waiting period is 90 days, but it can be less or more time. Examples include 30, 60, 90, or 180 days to 1 year to 2 year waiting period.
  9. Length of time or Benefit period. Think of the benefit period as the period of time you are eligible to collect benefits while on a disability insurance claim. The shortest period of time is coverage for 2 years up to life time benefits.

The underwriting for disability insurance is significantly different than the underwriting for life insurance.  As you get older, there is a higher probability of getting disabled and many people begin to develop ailments.  Therefore, over time it becomes more challenging and difficult to obtain reasonably priced long-term disability coverage.

It will depend on your overall health and what your doctors have put in your files.

Note that many insurance companies exclude coverage for Mental & nervous disorders, alcohol & drug claims, acts of war, and payments of claims caused during a crime.

Lastly, there are tax consequences for long-term disability insurance.

  1. If you pay the premium as an individual with after-tax dollars:  if/when you were collect insurance benefits, the benefits are tax-free.
  2. Benefits under an employer group plan are taxable if the employer paid the premium and the premiums were not taxable income to the employee.

If you’d like to set up an appointment to discuss your financial plan, we look forward to hearing from you.