How To Use Qualified Charitable Distributions For Charitable Giving

Each year, millions of Americans make donations to charitable organizations and receive something in return – a tax break. However, the 2017 Tax Cuts and Jobs Act curbed this tax advantage because it reduced the number of people eligible to claim a charitable deduction by raising the standard deduction. For 2020, the standard deduction is $12,400 for individuals and $24,800 for married couples filing jointly. If your list of deductions is not greater than those amounts, there is no tax benefit to itemizing – which means you might not be able to claim your charitable donation.

Without the ability to claim a deduction, some retirees just take their normal required minimum distribution (RMD) and bank the money, pay taxes on it and then make charitable gifts or tithe to their church on a monthly basis. For example, say your RMD is $10,000 and you pay 15 percent in taxes on this distribution. If you want to donate the money as a charitable gift, you’ll have only $8,500 left to do so.

However, there is a way to do this that will give you a tax advantage. A Qualified Charitable Distribution from an IRA enables retirees to claim their standard deduction and receive a tax benefit for their gift. The key is to arrange for the distribution to be made directly from your account custodian to the qualified 501(c)(3) charitable organization so that you do not take possession of the assets.

IRA owners may gift up to $100,000 each year, or $200,000 for a couple that files a joint tax return. Note that this option is available only for IRA owners over age 70½; it is not allowed for 401(k)s, 403(b)s, thrift savings plans, or other qualified plans. The QCD will be reported to the IRS and should be claimed by you on Form 1040 as an IRA distribution, but it will not be taxable. Another perk of this strategy is that the QCD can satisfy your annual Required Minimum Distribution (RMD). Be aware that if your QCD does not meet the full distribution amount required, you will have to withdraw and pay taxes on the remaining balance.

Another benefit of using an RMD for a charitable donation instead of receiving it as income is that this could keep you in a lower tax bracket. Consequently, it can help minimize taxes on Social Security benefits and keep your Medicare premiums low.

Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, RMDs are not mandatory in 2020. That’s because the initial market losses triggered by the COVID-19 outbreak were substantial; by not requiring distributions this year, retirement accounts have more time to potentially recover those losses.

Since it isn’t necessary to take an RMD this year, you might want to just make charitable gifts in cash. The CARES Act also enables this option by increasing the adjusted gross income (AGI) limit for individuals who qualify to itemize on their tax return. In 2020, you may deduct up to 100 percent of donations (up from 60 percent) against your AGI. For example, if you earn $500,000 in income, you may donate $500,000 and the entire amount is tax-deductible. This strategy is available to people younger than age 70½ and offers a benefit similar to the QCD.

Even if you don’t qualify to itemize, you may claim up to a $300 charitable gift deduction on your 2020 tax return. As always, it’s best to seek the advice of a tax professional in order to figure out what is best for your situation.

Why Sequence of Returns Risk Matters Now

That year or two when you are closing in on your retirement date, followed by a year or two after you retire, are the worst times for a sustained market decline. Market analysts call this scenario the sequence of returns (SOR) risk – because once your principal has been significantly reduced, there’s not enough time in the market left for you to recover those losses.

Two things will likely happen. First, the amount of retirement income you can withdraw each year is irrevocably reduced. For example, if you were planning to withdraw 4 percent a year from a $350,000 portfolio, you would have received a supplementary income of $14,000 a year. But if your principal drops to $280,000 a year, your 4 percent draw will generate only $11,200 a year. If you need that additional money, you will have to increase your draw to about 5 percent of the principal each year.

This leads us to the second consequence of a market decline: your principal will diminish faster. The longer you live, the greater your chances of running out of money.

How Big Is This Problem?

Because the coronavirus pandemic has sent stock markets reeling over the past few months, SOR risk has become a widespread concern. According to research by Spectrem Group, at the end of 2019 there were 11 million millionaires in the United States. By the end of March this year, at least half a million of those people were no longer millionaires.

While losses among millionaires may be disconcerting, the situation is far more dire for middle-class investors, who might not have several hundred thousand dollars to spare in their retirement portfolio.

Strategies To Offset SOR Risk

If the last recession is any indicator, the economic recovery going forward could take several years. That’s not good news for people who were looking forward to retirement. This group may want to seriously consider the merits of delaying retirement and continuing to work longer, such as:

  • Allowing their portfolio time to recover
  • Continuing to contribute to tax-advantaged retirement accounts
  • Enabling their Social Security benefits to accrue higher

Another strategy to help protect your portfolio against future SOR risk is to position a larger allocation to fixed-income assets and/or an annuity. While this might limit your potential for income growth in the future, these assets are backed by more reliable payors and less subject to the vagaries of the stock market. By diversifying your current assets, you can build multiple streams of reliable income to protect you from the future threat of market losses, a global pandemic or changes in Social Security benefits.

It’s worth considering that once we emerge from this current crisis, legislators will have to find a way to deal with the federal deficit and growing debt. The Social Security program was already projected to cut benefits by 2035 without any new funding solutions. Now, that threat is even further exacerbated by the enormous jump in unemployment numbers. This situation leaves even fewer people paying into the Social Security and Medicare programs.

All of this is why it’s very important to address today’s challenges presented by the sequence of returns risk. Explore ways to develop multiple income streams to protect your current assets and ensure they last throughout your lifetime.

Prospects for Investing in the 2020s

Investing in the 2020The third decade of the 21st century started out with a vigorous economy, record low unemployment levels, and benign inflation. But late in the first quarter over the span of two weeks, investors faced the fastest stock market correction in history.

With an unpredictable assailant like a global virus, short-term actions by Congress and the Federal Reserve will need time to see if they are effective. Ultimately, the fate of the U.S. and global economies, which in turn will impact the investment markets, is dependent on how long the COVID-19 outbreak continues and if there is a second wave. Clearly, both supply and demand have been dramatically reduced, with a ripple effect on companies, workers, consumers, and investors. Once the crisis has passed, we will learn which sectors, industries, and individual companies remain financially viable with a business model built to sustain this unprecedented economic fallout.

Amid this backdrop, wealth managers must read the tea leaves to anticipate what the investment markets will look like post-coronavirus. The challenge is how to best position assets to take advantage of future gains without giving up ground now and turning paper losses into permanent shortfalls.

For individual investors, it comes down to what you want to accomplish in the next decade – or what your money can accomplish for you. Are you nearing retirement? Will you remain in the accumulation phase, wherein you can afford to take on market risk? Are you just starting out, and are you risk-averse due to the two major economic declines experienced in your relatively short life, or are you prepared to invest in future prospects – wherever they may lie?

Anyone already in or nearing retirement would do well to invest for a steady stream of income. While the DJIA initially took a beating, many blue-chip stalwarts continue to grow and payout dividends as they have long term, through thick and thin. However, pay attention here, as there are some long-standing dividend-paying companies that are starting to suspend or substantially cut dividend payments.

Growth-oriented investors would do well to look at companies that were well-positioned to survive the pandemic, because they may well represent commerce of the future. This includes the well-established FAANG stocks (Facebook, Apple, Amazon, Netflix, and Google), which have become masters of fast and reliable delivery of online content and physical delivery of essential and discretionary products. Unfortunately, the stock prices of these companies have soared in recent years, so it’s time to consider what the “next big thing” in this arena will look like and who are the frontrunners.

With that in mind, take a look at 2020 demographics. Millennials recently surpassed Baby Boomers as the largest generation in the United States, but they aren’t expected to hold this mantle for long. Generation Z/Centennials are on track to enter the workforce in higher numbers during the next decade. This is a generation that has never known life without cell phones and the internet, so expect the technology sector to ramp up not just with consumer innovations, but with ways to help other industries enhance data management, blockchain supply chains, and artificial intelligence – which might become as omnipresent as retail strip malls.

In a post-pandemic world, employers seeking to strengthen their business models might come to embrace the idea of foregoing healthcare and other expensive benefits offered to employees. A subsequent world of higher pay and more public options could spur the growth of entrepreneurship and new small businesses. By taking advantage of remote employees, low overhead expenses, and emerging technologies, smaller companies or conglomerates might be able to compete with the likes of Amazon in both domestic and global markets.

As a short-term precaution, consider how you might defend your portfolio against the possibility of inflation as we stumble out of the pandemic economy. The federal government’s generous stimulus packages combined with a continued easing of monetary policy by the Federal Reserve could lead the United States to higher inflation. This could be exacerbated by the recent shutdown of production in many industries; the initial low supply of products also might contribute to price escalation. During this interim, investors may want to consider investing in commodities and Treasury Inflation-Protected Securities for inflation protection.

As always, it’s best to seek the advice of a professional in this ever-changing environment.

Economic Correlation: Cyclical and Non-Cyclical Stocks

A rising tide might lift all boats, but the same cannot be said for the economy.

When the U.S. experiences robust economic growth, certain sectors of the stock market tend to rise while others hold steady or even decline by comparison. The stocks of companies that experience higher revenues are typically categorized as cyclical. In other words, their good fortune rests mainly on consumers being gainfully employed and having ample discretionary income with which to buy more goods and services.

Take, for example, auto manufacturers. Sales typically increase when more people can afford to buy a new car. But that’s not all the time, because the economy is cyclical – it ebbs and flows over time. Therefore, companies that produce non-essential products – sometimes referred to as consumer discretionary goods and services – tend to flourish during economic cycles of strength and rising GDP. That is why they are called cyclical stocks.

But when the economic future is in decline or at least uncertain, people tend to delay buying non-essential items like a new car. When the economy really takes a nosedive, more consumers are affected, they buy less stuff, manufacturing takes a hit and companies start laying off their workforce.

Despite these unfortunate circumstances, people still have to eat. They buy essential items, such as food and toothpaste and toilet paper. These are considered consumer staples, and the stocks of companies that produce these types of goods are defined as non-cyclical stocks. That’s because those companies are expected to continue earning revenues regardless of economic cycles. Non-cyclical industries include food and beverage, tobacco, household and personal products.

Another non-cyclical sector is utilities. Utilities are a little bit different because people tend to purchase relatively the same amount of utility service – with exceptions for extreme weather or making slight thermostat adjustments to save money – whether the economy is robust or in a downward spiral. Because of this, utility companies are considered a very stable business model.

For investors, that means they are well-established, long-term performers and usually pay out high dividends. Not only are utility stocks a good option for retirees seeking income to supplement their Social Security benefits, but they offer a safe haven for investors to relocate assets during periods of economic decline.

In light of recent cautions by economists predicting a recession in 2020, this could be a good time to review your portfolio from the perspective of cyclical versus non-cyclical holdings. It doesn’t mean you need to sell completely out of your stock allocation; perhaps just temper your holdings to equities that tend to perform reliably regardless of the economy. In addition to consumer staples and utilities, consider companies that specialize in national defense, waste management, data processing and payments.

Also be aware that the past three decades have boasted several of the longest running economic expansions in U.S. history (1991 to 2001; 2001 to early 2007; 2009 through 2019). What this tells us is that U.S. economic growth cycles appear to be lengthening while declines are relatively shorter and followed up with impressive recovery periods.

So, take heart. If you decide to transfer some of your assets to less flashy, non-cyclical securities, you might not have to leave them there for long. However, it’s always a good idea to maintain a diversified portfolio so you don’t have to make adjustments based on economic cycles. And as always, consult an investment professional to help you make these important decisions.

Gross Domestic Product: A Primer

The economic indicator known as Gross Domestic Product (GDP) represents the dollar value of all purchased goods and services over the course of one year. It is comprised of purchases from all private and public consumption, including for profit, nonprofit and government sectors.

There are four components that are added to calculate the GDP:

  • Consumer spending
  • Government spending
  • Investment spending (this includes business, inventory, residential construction and public investment),   Net exports, meaning the value of goods exported minus the value of goods imported

The government calculates and publishes the GDP rate on a quarterly basis and for the entire year.

What Affects GDP?

There are different ways GDP is measured. For example, nominal GDP refers to a straight calculation of raw data, while real GDP adjusts the calculation to include the impact of inflation.

When inflation increases, the GDP tends to rise; when prices drop, so does the GDP. Be aware that this adjustment can happen even when there is no change in the quantity of goods and services produced in the United States during that time frame.

A key component of the GDP calculation is net exports. This number rises when the country sells more goods and services to foreign countries than it buys from them. A trade surplus means the United States sells more than it purchases, which is a strong contributor to GDP. When the United States buys more foreign goods than it sells, this creates a trade deficit, which is a negative weight in the GDP calculation.

GDP also reflects demand. The dollar output of certain sectors and industries rises and falls based on the popularity of their products and services. For example, when a new product is well received, then those sales increase that sector’s contribution to the GDP. This is a helpful measure because it enables companies to make better research and development decisions based on recent success. The same is true when a new product, or even an upgrade to a new product, does not increase sales.

What Does GDP Indicate?

The GDP is the most common, broad-based measure used to monitor the country’s economic progress. When it is on the rise, the economy is considered to be growing. When the GDP rate drops – even if it remains in positive territory – the economy is viewed as contracting. If it continues to slip quarter after quarter, it is an indicator that the economy might be in trouble and the Federal Reserve or Congress could consider altering monetary (interest rates) or fiscal (taxes and government spending) policy to inject cash into the nation’s financial system.

Technically, economists define a recession as a prolonged period of economic decline, often precipitated by two consecutive quarters of negative GDP growth.

This economic yardstick also is used to indicate a country’s general standard of living. The better a country is able to produce the goods and services that its residents and businesses use, the more that capital is infused back into the country. Therefore, higher GDP levels indicate a more prosperous country and relatively higher standard of living among its residents.

The GDP doesn’t just gauge domestic economic health, it serves as a comparison measure to other countries. This is particularly important during periods of growth and decline, when the United States can track how well it is responding to global economic factors relative to other countries.

Current Trendline

According to the Bureau of Economic Analysis, first quarter real GDP closed at 3.1 percent. In the second quarter, real GDP fell to 2.0 percent. The advanced assessment for the third quarter of 2019 is 1.9 percent.

 

What to Expect and How to Prepare for a Recession

Prepare for a RecessionEconomists generally determine that the country has fallen into a recession after two consecutive quarters of negative gross domestic product (GDP) growth. Since 1967, the United States has experienced seven recessions.

The thing is, predicting a recession is a little like predicting a tornado. Experts are never exactly sure if or when one will occur, but they can cite when conditions a ripe for one based past experience. The good news for predictors is that the economy follows a similar pattern of indicators in the months leading up to a recession.

The bad news is that many those indicators have recently emerged. For example:

  • Inverted Yield Curve – This is when the yield on longer-term Treasury bonds is lower than the yield on shorter-term Treasury bonds, which happened recently for the first time since 2007. On average, an inverted yield curve has occurred 14 months in advance of every recession in the past 50 years.
  • Corporate Profits – Estimates for corporate earnings growth have dropped substantially since last year, from 7.6 percent to 2.3 percent.
  • Global Trade – The ongoing U.S. trade war with China has resulted in weakness in the manufacturing and farming industries. Moreover, global trade volume is also down, which further reduces the market for U.S.-manufactured goods.

What to Expect in a Recession

The worst recession in U.S. history was the most recent one, between 2007 and 2009. Dubbed the Great Recession, it was short (compared to the Great Depression of 1929-1939) but it took a powerful toll on a large chunk of the population. For example, close to half of U.S. households lost at least 25 percent of their net worth; one out of every four households lost at least 75 percent of their net worth.

About one-third of households experienced one or more of the following:

  • Fell more than two months behind on their mortgage
  • Had their home foreclosed
  • Had their home equity drop into negative territory
  • Lost a job

That was a bad recession. Fortunately, while economists are seeing signs of another one on the horizon, as of now (absent any significant shocks) they do not expect it to be as severe.

Tips to Prepare for a Recession

With multiple warning signs evident, it appears we do have some time before a recession potentially hits. It’s a good idea to use this time to protect your financial situation to help minimize any impact that a recession can have on you personally. The following are some tips to consider.

Shore Up Your Finances

Start by reducing your debt as much as possible, particularly any accounts exposed to a variable interest rate. The interest on credit cards and home equity lines of credit have a habit of increasing when you can least afford it. If you have a variable rate mortgage you might want to refinance at today’s low fixed mortgage rates so your monthly payments do not increase. One way to generate a robust savings fund is to temporarily suspend contributions to a retirement plan and save that money in a readily available account.

Minimize Household Expenses

Most people have to cut back on household expenses during a recession, so you might as well start now to help you prepare. For example, consider trading in a gas-guzzling car for one with better gas mileage and lower monthly payments, or pull the plug on cable TV and switch to a streaming service. Deploying these cost-reduction strategies now not only reduces your expenses during a recession but will also help contribute to your savings fund.

In many areas of the country, real estate prices are at the top of the market. It might be worth considering selling your house now while you can get a good price. This will give you a pot of cash to sit on during the recession, which is especially helpful if you lose your job. In fact, after the sale you may consider renting until real estate prices drop and you can purchase another home at a good price – and maintain a healthy cache of savings. This strategy could also save you from raiding your investment portfolio for money – helping protect your future financial security.

Protect Your Investment Portfolio

Take a good look at your portfolio and give it a recession stress test. Consider reallocating some funds to options that tend to perform reliably during an economic decline, such as:

  • Government bonds
  • Treasury Inflation-Protected Securities (TIPS)
  • Corporate Inflation-Protected Securities (CIPS)
  • Consumer staples stocks
  • Well-established dividend stocks
  • Fixed Income Annuity (FIA)

Recognize that it is generally not a good idea to completely cash out of the market. The best way to accumulate wealth over time is to stay invested regardless of temporary economic declines. In fact, investors who maintained their market positions between 2007 and 2017 experienced an average 240 percent growth rate.

Once the recession has ended, think about rebalancing your portfolio to realign its strategic asset allocation with your investment objectives and timeline. This allows you to cash in on outperforming assets and buy into depressed securities that could be poised for post-recession growth.

How to Inflation-Proof a Retirement Portfolio

How to Inflation-Proof a Retirement PortfolioStatistics indicate that the average life expectancy is longer than it used to be, but empirically we see this every day among elderly people who have lived much longer than they probably expected. This phenomenon spotlights a particular component of retirement planning that was not as significant in the past as it is now: long-term inflation.

While we’ve not experienced annual inflation rates this century as high as the latter part of the 20th century, inflation can balloon at any time. But what can be even more devastating to a retiree on a fixed income is cumulative inflation over time. It’s also important to recognize that specific consumer product inflation rates can differ substantially from the averages.

For example, according to the Bureau of Labor Statistics, the cost (not always the price a consumer pays) of an oil change in 2000 was about $20. However, motor oil, coolant and fluids have experienced an average inflation rate of 5.66 percent per year – so in 2019 the cost of providing an oil change was about $56.89. That’s a 184.45 percent increase in less than 20 years for a common household expense during a normal retirement timeframe.

To build a portfolio designed to provide inflation-adjusted income throughout a long retirement, consider the following tactics.

Optimize Your Social Security Benefits

Social Security benefits receive periodic cost of living adjustments (COLA) based on the Consumer Price Index (CPI), which is a weighted average of prices of common goods and services purchased by all urban consumers. However, retirees spend more of their household income on goods and services that experience higher levels of inflation, such as medical services. Therefore, Social Security benefit increases might not keep up with a retiree’s actual cost of living – especially over time.

That’s why it’s important to consider inflation in order to optimize your Social Security benefits. In other words, except for people in exceedingly poor health (expected to die within a few years) or in dire circumstances, it’s a good idea to delay starting Social Security benefits as long as you can. If you can wait until age 70, benefits will increase by as much as 8 percent each 12-month period past your full retirement age. Delaying not only increases the level of income you’ll receive each month, but it also gives you more time to save money for retirement and allows your investments more time to grow.

Inflation-Aligned Investments

Another way to inflation-proof your retirement portfolio is to allocate a portion of assets to investments that tend to increase at the same pace as inflation. The following are some options you might want to consider.

  • Series I Savings Bond – The I-Bond, guaranteed by the federal ­government, helps protect an investor from creeping inflation in a couple of ways. First, the I-Bond credits the holder’s account with a fixed interest rate plus the annualized inflation rate from the preceding six months. Second, the account value does not drop when prices fall.
  • TIPS – Treasury Inflation-Protected Securities (TIPS) are marketable securities whose principal increases and decreases in tandem with the inflation rate (adjusted every six months). However, the coupon rate is fixed, so payouts vary based only on the inflation-adjusted principal. Upon maturity, the investor receives the greater of the adjusted principal or the original principal.
  • CIPS – Corporate Inflation Protected Securities (CIPS) are similar to TIPS, but they invest in corporate bonds and typically pay a higher yield that combines a fixed payout plus the variable CPI rate. Unlike TIPS, they are not guaranteed by the U.S. government but are backed by the financial strength of the issuing company.
  • REITS – A Real Estate Investment Trust (REIT) pays out reliable dividend income that tends to rise with inflation. REITS own or finance a diversified portfolio of income-producing real estate, such as office buildings, apartment buildings, warehouses, retail centers or hotels. REIT dividends have outpaced inflation in all but two of the past 20 years, according to the National Association of Real Estate Investment Trusts.
  • IPA – With an inflation-protected annuity (IPA), initial income payouts are low but rise over time to align with long-term inflation, based on a formula linked to the CPI. A differentiating benefit of an IPA is that it offers issuer-guaranteed income for life, so the retiree doesn’t have to worry about reinvesting assets during later stages of retirement.

It is a good idea to work with a financial advisor to incorporate inflation-resistant investments for your retirement portfolio based on your individual objectives, tolerance for risk and timeline.

Lost Inheritance: How To Find a Deceased Parent’s Assets

If you have a relative who recently died and left you in charge of his or her finances, you are not alone. You probably have colleagues at work in the same boat. A neighbor or two (or 10) and even your millennial yoga teacher might very well be working through a quagmire of wills, probates and assets nobody can find. You are definitely not the only one.

The internet has made it much easier to keep track of our checking, savings and investment accounts. But the elder generation generally missed out on the convenience of dashboard consolidation and app trackers. What most of them leave behind are file cabinets full of bank statements and old bills, bookshelves of file folders and prospectuses – perhaps once carefully catalogued. You may start rummaging through papers and not find anything more recent than five years ago.

How do you wrap your hands around investments and assets you know your dad owned but have no idea where they are?

Bear in mind that when there is no activity in an account for a year or more, assets may be deemed dormant or abandoned. They could eventually become property of the domicile state through a process called escheat, so it is important that you do not wait too long before finding lost assets.

Start at Home

If your parent used a computer, you should get access to his file folders and dig into his email account to see if he received any electronic communications from financial companies. If he wasn’t computer literate, then start with the mail. It may take six months to a year to get your hands on all of the paperwork, but if your relative did not sign up for electronic delivery then companies are required to send him statements through the U.S. mail.

If no one continues to live at his home, the easiest way to do this is to notify the post office to route all of his mail to your address. To do this, you will need to complete a Forwarding Change of Address order at the post office and provide proof that you are authorized to manage the deceased’s mail.

As you’re rummaging through Dad’s paperwork, here are some tips on what to do:

  • Look for bills and check if those entities are holding a utility deposit;
  • Look for statements for bank accounts, bonds, stocks, mutual funds, CDs, dividend or payroll checks, life insurance policies and retirement accounts;
  • Look for any record of a safe deposit box, such as a bill for the rental or a key; if he has one it is most likely located at his bank branch;
  • Contact his past employers to ask if they have any record of pensions, retirement plans or employer-purchased life insurance for your parent.

Once you get your hands on any statements, call the company or broker listed. You will need to send them certain documents to verify your parent is deceased (or a durable power of attorney document if he is incapacitated). Different firms and circumstances might have different requirements, but you’ll definitely need to send a copy of the death certificate. You may also be asked to provide a Court Letter of Appointment naming you as executor, a “stock power” of attorney that enables you to transfer ownership of stock, a state tax inheritance waiver, affidavit of domicile, trustee certification showing successor trustee, and/or a letter of authorization for joint accounts.

You’ll need to call and provide these or similar documents for each institution where your parent holds assets. Don’t worry, these companies have trained staff to help guide you through the legal process of how to manage the assets of deceased account owners.

Move to the Internet

Check unclaimed property lists at every state where your father lived. Get started at Unclaimed.org, a free website that allows you to search for unclaimed property held by each state. Also search at MissingMoney.com to conduct a national search.

Go to the Pros

If you’re sure your relative had more assets than you’re able to find, consider hiring a forensic accountant. These professionals have the tools and expertise to find offshore accounts, shell companies and other types of financial accounting practices. For example, a forensic accountant may request an IRS transcript that reports past 1099-DIV and 1099-INT distributions. Note that banks are required to issue such forms for account activity involving $10 or more.

You also may want to share your task with your own financial advisors. They might be able to recommend ways to help you track down, transfer and manage your parents’ assets, particularly if you need to set up income sources for another parent or relative. The point is, you don’t have to go it alone. This is a common problem and there are experts to help you work through it – but it will likely take time, patience and a lot of paperwork.

Benefits of Delaying Retirement Number Many

Benefits of Delaying Retirement

Traditionally, retirement was short and peaceful. People worked jobs that were hard on the body – such as farming, manufacturing, tradesmen or railroad workers. If you made it to retirement, you were relieved to have the chance to wind down your days in restful repose.

That all changed in the latter part of the 20th century. Retirees began to take advantage of affordable travel opportunities enabled by cars that could drive great distances and highways that could accommodate them, as well as regional intracontinental airlines. In the 1980s, exercise became a popular pastime and retirees could be found at fitness clubs, aerobics classes and racquetball courts. There was a sweet spot in time when retirement was short enough not to outlive savings and retirees were healthy enough to enjoy an active leisure life.

But a lot of things have changed over the past 30 years. More jobs are automated and life expectancy rates, especially for people who reach age 65, are longer than ever. By middle age, it is common to have developed one or more chronic conditions, making a long retirement a less-than-healthy one. Furthermore, we experienced a pretty severe recession and slow economic recovery, when many pre-retirees had to dig into their savings just to stay above water.

Another area that has changed is the transition from employer-sponsored pensions to 401(k) plans. This has fostered a different way of looking at retirement. Back when many workers had pensions, all they had to do was accumulate enough credits and they could retire with a guaranteed stream of income for life. That gave people something to look forward to. Now, with self-directed retirement plans, workers know that the longer they work the more they can save and the longer their investments have time to grow – which actually creates an incentive to work longer. Another reason people tend to work until at least age 65 is so they don’t have to pay for their own healthcare insurance, for which premiums have grown exponentially over the past 15 years.

In addition, the longer we earn an income the longer we can delay drawing Social Security benefits. Once you start taking a benefit, that payout level remains permanent throughout your life. However, the longer you wait, the higher the payout. In fact, people who delay to age 70 can take advantage of Delayed Retirement Credits, which increase their level of payout 5.5 percent to 8 percent a year past full retirement age.

Now that people are living longer, many are healthy enough to continue working longer as well. Plenty of employees want to continue working not only for the money, but for social interaction and intellectual engagement. When retirement was 10 years or less, that seemed like enough time to wind down and relax. But with today’s workers facing 30 years or more in retirement, the prospect of not having a regular place to go, people to see, and work to do for a few decades isn’t quite as appealing.

However, what if you hate your job and can’t imagine staying on past traditional retirement age? A recent study found that people who changed jobs in their 50s were more likely to work longer. In some scenarios, using well-earned experience can translate into a more rewarding job opportunity. Consider that even if you don’t earn more money, a lateral move could still yield higher financial rewards if you enjoy the new job and want to continue working there indefinitely.

Some retirees decide to go back to work because they’ve had a bit of fun but find they miss the day-to-day routine of work and having a broader network of interpersonal relationships. In fact, they often find their experience and expertise was sorely missed, and in some situations, are more valued by their colleagues. This might not happen in all cases, but the lure of renewing friendships, professional appreciation and additional income offer compelling reasons to come out of retirement.

 

April 1 Deadline Approaches for Taking Required Retirement Plan Distributions

IRS Reminds Taxpayers of April 1 Deadline to Take Required Retirement Plan Distributions

IRS Issue Number:  IR-2017-63

WASHINGTON — The Internal Revenue Service today reminded taxpayers who turned age 70½ during 2016 that, in most cases, they must start receiving required minimum distributions (RMDs) from Individual Retirement Accounts (IRAs) and workplace retirement plans by Saturday, April 1, 2017.

The April 1 deadline applies to owners of traditional (including SEP and SIMPLE) IRAs but not Roth IRAs. It also typically applies to participants in various workplace retirement plans, including 401(k), 403(b) and 457(b) plans.

The April 1 deadline only applies to the required distribution for the first year. For all subsequent years, the RMD must be made by Dec. 31. A taxpayer who turned 70½ in 2016 (born after June 30, 1945 and before July 1, 1946) and receives the first required distribution (for 2016) on April 1, 2017, for example, must still receive the second RMD by Dec. 31, 2017. 

Affected taxpayers who turned 70½ during 2016 must figure the RMD for the first year using the life expectancy as of their birthday in 2016 and their account balance on Dec. 31, 2015. The trustee reports the year-end account value to the IRA owner on Form 5498 in Box 5. Worksheets and life expectancy tables for making this computation can be found in the appendices to Publication 590-B.

Most taxpayers use Table III  (Uniform Lifetime) to figure their RMD. For a taxpayer who reached age 70½ in 2016 and turned 71 before the end of the year, for example, the first required distribution would be based on a distribution period of 26.5 years. A separate table, Table II, applies to a taxpayer married to a spouse who is more than 10 years younger and is the taxpayer’s only beneficiary. Both tables can be found in the appendices to Publication 590-B. 

Though the April 1 deadline is mandatory for all owners of traditional IRAs and most participants in workplace retirement plans, some people with workplace plans can wait longer to receive their RMD. Employees who are still working usually can, if their plan allows, wait until April 1 of the year after they retire to start receiving these distributions. See Tax on Excess Accumulation  in Publication 575. Employees of public schools and certain tax-exempt organizations with 403(b) plan accruals before 1987 should check with their employer, plan administrator or provider to see how to treat these accruals.

The IRS encourages taxpayers to begin planning now for any distributions required during 2017. An IRA trustee must either report the amount of the RMD to the IRA owner or offer to calculate it for the owner. Often, the trustee shows the RMD amount in Box 12b on Form 5498. For a 2017 RMD, this amount would be on the 2016 Form 5498 that is normally issued in January 2017.

IRA owners can use a qualified charitable distribution (QCD) paid directly from an IRA to an eligible charity to meet part or all of their RMD obligation. Available only to IRA owners age 70½ or older, the maximum annual exclusion for QCDs is $100,000. For details, see the QCD discussion in Publication 590-B.

A 50 percent tax normally applies to any required amounts not received by the April 1 deadline. Report this tax on Form 5329 Part IX. For details, see the instructions for Part IX of this form.