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.

Does Obama’s Proposed 2015 Budget Affect Your Retirement Planning? It Does. Here’s How.

President Obama’s proposed 2015 budget would limit tax deductible contributions to 401(k)s and IRAs to 28% of income and cap retirement savers’ tax-deferred accounts to an amount needed to produce a joint and 100% survivor annuity of $210,000 beginning at age 62 (presently $3.2 million). The budget would also eliminate the carried interest provision that allows income from managed retirement investments to be taxed at the capital gains rate, while dropping the “chained” consumer price index proposal reducing Social Security cost-of-living adjustments.

Budget 2015
Additionally, it would require that Roth IRAs follow the same required minimum distribution rules as other retirement accounts (RMDs at 70 ½ similar to traditional IRAs). It also establishes a 5-year rule for IRAs inherited by (most) non-spouse beneficiaries (requiring that distributions be taken out over a five-year period of time) and establishes 60-day rollover rule for IRAs inherited by non-spouse beneficiaries. Finally, the budget includes mandatory automatic IRA enrollment for small businesses and RMD elimination for small retirement accounts of $100,000 (cumulative across all retirement plans).

Even though these provisions may not be enacted, it’s helpful to know what the President’s legislative agenda for this year is. We will monitor and keep you apprised of any developments.

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.

5 Risks to your Retirement Planning

dice money retirement riskOne of the biggest retirement issues that people face is that they have not spent enough time planning for retirement and therefore don’t have a plan in place to retire confidently.   No matter your age, you should have a plan that is specifically designed to meet your personal goals and needs while taking into account your time horizon and level of risk tolerance.

Every retirement plan should:

1. Provide for predictable streams of income that are reliable and can help avoid surprises. 

2. Allow for access to your financial assets to meet your changing needs over time

3. Include some elements for growth opportunities so that your income has the potential to keep pace with inflation.

 

There are 5 big retirement risks that people face:

1.  Inflation Risk  This is your reduction in purchasing power over time.  At a bare minimum, your income should keep pace with inflation in order to maintain your standard of living.  Did you know that you that you would need $264.12 in 2010 to match the buying power of $100 in 1980.  [Beauty of Labor statistics, CDI calculator 2010]

2. Healthcare Risk The cost of healthcare has increased dramatically.  Did you know that the average price increase of prescription drugs from 1994-2005 was 8.3% per year?

3. Longevity Risk  This is the possibility of people outliving their financial assets.  Did you know that there is a 63% probability that one person from any given couple (currently age ~65) will live to age 90?  With many people living 20-30 years (or more!) in retirement, it is important to appropriately plan so that your financial assets don’t run out.

4. Excess Withdrawal Risk This is the risk of withdrawing too much money from your investment portfolio too quickly, which could result in running out of money.  Did you know that 70% of people falsely believe they can safely withdraw 10% or more a year from their retirement saving?

5. Market Risk This is the possibility that you have investment losses that may reduce the amount of money you have to live on in retirement. 

 

In order to retire with confidence, developing a sound retirement plan that addresses these specific issues is integral, instrumental, fundamental.  We will dive more deeply into these topics in the coming weeks.  For now, if you have questions or want to set up an initial assessment of your retirement strategy, contact us.

Is The PBGC is going bankrupt? How it affects your retirement.

monopolyLast week, in it’s annual report, the PBGC announced a record deficit of $35.7 billion.

The Pension Benefit Guaranty Corporation (PBGC) is a United States Federal Agency that was created by the Employee Retirement Income Security Act of 1974 (ERISA) to protect companies’ pension benefits[1].  For companies whose pension plans are insured by the PBGC, the PBGC will pay employees a portion of the pension funds if the company goes bankrupt.

The PBGC’s deficit has been increasing annually over the past several years due to a variety of factors.  Unless the government steps in, this will result in the PBGC going bankrupt.

As you review your own company’s retirement plan options (for example taking an annuity option versus a lump sum distribution), knowing the back-up plan is important. If the company cannot meet its payout obligation, and the PBGC is having its own financial challenges, what are you to do in order to protect your pension payouts?

Why does this matter for you? If you were to take an annuity option from your employer when you retire and the company were to go bust, what will the PBGC do for you?

  1. The PBGC does not guarantee every dollar owed to you from your company pension plan – there is an annual cap.  For 2013, the maximum guaranteed about is $ $57,000/year (for people who begin receiving benefits at age 65).
  2. The PBGC is running a deficit that will eventually bankrupt it, voiding your pension guaranty.
  3. The time has come for people to start saving outside of their employer’s plans for their retirement.

There are some major misconceptions about what retirement is and how much money you need to put away to have a comfortable retirement.

  • The typical American household will experience a 28% income shortfall in retirement?[2]
  • 4 out of 10 retirees do not have sufficient income to cover their monthly expenses.

It is time to take additional steps to prepare for your retirement. You should not solely rely on your company being able to pay your pension, nor the PBGC to pay you either.

Call us today to schedule a retirement savings assessment and discuss retirement planning and year-end planning opportunities to minimize taxes today so you can have a more secure future.


[1] In private defined benefit pension plans

[2] 2012 Fidelity Retirement Savings Assessment

Last Minute Tax & Financial Planning Moves to Save Money for 2013

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With November around the corner, we’re beginning to think about year-end tax & financial planning.

In fact, now is a great time to focus on last minute tax and financial planning moves to save money for 2013 (and possibly longer!).

Here are a few ways to save $ before New Year’s Day:

1. Make charitable gifts of appreciated stock.  If you have appreciated stock that you’ve held for more than a year and you plan to make a significant charitable contribution before the end of the year, you’re probably best off keeping your cash and donating the stock instead.  Why?  You’ll avoid paying tax on the appreciation and you’ll be able to deduct the entire charitable gift at its full fair market value.  It’s a win for you & for the recipient of your gift.

2.  If it looks like you will owe taxes for 2013, adjust your federal income tax withholding before the end of the year.  If you missed the mark on planning ahead, there is still time to make adjustments and avoid penalties.

3.  If you have a healthcare Flexible Spending Account (FSA), use it, don’t lose it!  Make sure to take advantage of spending the pre-tax money in the account before the end of the year for any remaining amounts over $500.  Anything under $500 can now be “rolled over” into the new year, a newly modified ruling by the IRS.

4.  If you pay quarterly estimated taxes (which are due on January 15, 2014), you can prepay the state estimated tax payment by the end of the year to receive a tax deduction (subject to certain limitations and the alternative minimum tax).

5.  If you are a senior over the age of 70.5:

  • Make charitable donations from your IRA account, which are set to expire this year.
  • Make sure you take your required minimum distribution (RMD) from your IRA.  Failure to take your RMD results in a penalty of 50% of the amount not withdrawn.

6.  If you work & have a 401K:

  • Make sure to maximize your 401K contributions – don’t miss out on money you can contribute on a pre-tax basis (not to mention employer matching opportunities).

7. If you’re self-employed:

  • If you are a sole proprietor, don’t miss the opportunity to minimize taxes by employing your children under the age of 18.  Paying wages to children under 18 shifts income to your child who is in a lower tax bracket; in fact, you may be able to avoid taxes entirely because of your child’s standard deduction (assuming the wages paid are less than or equal to the 2013 standard deduction of $6100).  Additionally, since your child is earning income, he/she is eligible to contribute to an IRA account, thereby getting an early start on saving for retirement.
  • If you are looking to reduce your tax bill while saving for retirement, you may wish to consider establishing a retirement plan before the end of the year (such as a defined contribution plan or a defined benefit pension plan).  These plans need to be established before the end of the year and contributing money now to these accounts starts the tax-deferred growth on your contributions.

Now is a great time to make year-end adjustments.  If you are interested in learning more about year-end financial planning, call us.

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3 Reasons Why You Need to Have a Will

3 Reasons Why You Need to Have a Will

This week is National Estate Planning Awareness Week, which begs the question: why do I need a will? 

In fact, more than 50% of Americans do not have a will, according to a 2012 Rocket Law survey, putting their families, assets, and legacies at risk.

Here are 3 reasons to be prepared:

1. Protect your assets.  When someone dies without a will, they die intestate.  If you die intestate, your estate is sent through probate court and determined by your state’s succession laws.

State imposed rules do not fulfill the wishes of the deceased. They are inflexible, impractical, and never include provisions for anyone not related to you.  So, if you want to hand down your grandmother’s china to your stepdaughter, to have your best friend look after your dog, or to leave any of your estate to someone outside your immediate family, it is imperative to have a legal will in place.

Most people spend their entire lives working to create their assets; having a will in place ensures that your possessions and other assets end up in the hands of the people you care about.

 

2. Protect your children.   One of the most important ways to provide for your children in the event that you are no longer around to do so is to designate a guardian and make a contingency plan that includes the logistics and financial aspects of caring for them.  Writing a will allows you to designate the person that you want to care for your children.  In the event of the death of both parents without a legal will, the state steps in and appoints the guardian of its choice for your children; there is no guarantee the state-appointed guardian will share your morals or values. 

This is especially important for parents of special needs children.  Parents with children who have special needs should create a supplemental needs trust, a special type of trust which ensures that the children do not lose access to needs-based government benefits due to inheritance of assets. 

3. Protect your legacy.  Adding the stress of fighting with lawyers (and possibly family disputes) is the last thing anyone wants while grieving for a loved one.  Writing a will allows you to choose fiduciaries, the person/people/institutions responsible for the administrative work after your death.  Appointing someone to manage your money, file paperwork such as tax returns, and protect your property ensures that your legacy is administered as you intended and protects your loved ones from unnecessary bureaucracy and stress.

  

It is important to plan ahead.  Contact us today at 212-221-7067 to learn more about what we can offer you from our Estate & Charitable Planning Services.

 


Estate Tax & Transfer Analysis • Tax Reduction Strategies • Gifting Strategies • Charitable Giving • Planning For Children with Special Needs • Survivor Planning & Services