Thursday
Apr172014

Avoiding Double Taxation of IRA Contributions

 In my previous blog I described some of the rules surrounding making and deducting IRA contributions.   If you are over the IRS income thresholds, you can still make the IRA contribution, you just won’t be able to deduct it on your taxes – the contribution would be made with after-tax dollars.  This is where tax form 8606 comes into play. 

What is Tax Form 8606?

You are required to file Form 8606 when you make a non-deductible IRA contribution; this tax form will document the contribution amount for the current year.  It must also be filed with your taxes when you withdraw funds from an IRA in which non-deductible contributions were made.  If you don’t file this important tax form, when you go to withdraw funds you’ll face tax consequences. Any amount you contributed that did not receive a tax deduction (after-tax dollar contributions) will be treated as if it did, in fact, receive a tax-deduction and you will be taxed AGAIN on the money.  If you do file form 8606 properly, when you go to take a distribution, a portion will be taxable (any earnings) and a portion will not (return of original after-tax contribution). 

Is your head spinning yet?  Things get confusing quickly and mistakes can happen VERY easily when making non-deductible IRA contributions. Those mistakes could potentially result in double taxation of contributions that could cost investors substantial amounts of money over the course of their retirement.   Not many people want to deal with tracking contributions over the course of a career and will elect to not make non-deductible IRA contributions because of the potential administrative nightmare it can create.  

Non-deductible IRA Alternatives

So what else is there if you have additional funds to invest beyond maxing out a company retirement plan?  If your income is within the IRS limits, you could consider contributing to a Roth IRA.  As with a non-deductible IRA, contributions are made with after-tax dollars. However, all withdrawals, including earnings are not taxable if a qualified distribution occurs.  If income is too high for Roth contributions, you still might be able to contribute by utilizing the “back door” conversion strategy.  If you are phased out from the Roth because of your high income (a good problem to have!) and you don’t fit the mold for a Roth conversion, you could consider opening a taxable brokerage account. Those funds would not grow tax-deferred, but withdrawals would not be included in ordinary income like an IRA because you never received a tax deduction on the contributions.   

As you can see, there are many subtle nuances of different types of retirement and investment accounts.  Your planner can help you identify which accounts make the most sense for you based on your current and projected financial situation.  Working with someone you trust thoroughly to help you make these decisions is imperative and is something we deeply care about at The Center.

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.


The information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Unless certain criteria are met, Roth IRA owners must be 59 ½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Converting a traditional IRA into a Roth IRA has tax implications. Changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. As Financial Advisors of RJFS, we are not qualified to render advice on tax matters. You should discuss tax matters with the appropriate professional. C14-009867

Tuesday
Apr152014

Why You Can’t Always Take a Tax Deduction on an IRA

 On deadline day for filing your taxes, you may be considering making last-minute Traditional IRA contribution.  Most people contribute to an IRA to 1) save for retirement and 2) take a tax deduction on the contribution to hopefully lower one’s overall tax bill.  Many people, however, are not aware that there is a good chance that the IRA contribution they are intending to make or have made in the past, does not allow for a tax deduction. This happens if you are above IRS adjusted gross income (AGI) thresholds.  Eligibility to deduct depends on income and whether or not you are covered under an employer sponsored retirement plan, such as 401k or 403b.

Married Filing Jointly

Both spouses are covered under an employer sponsored retirement plan at work

  • Income limit to be able to fully deduct an IRA contribution - $96,000

Only one spouse is covered under an employer sponsored retirement plan at work

  • Income limit to be able to fully deduct an IRA contribution - $181,000

Neither spouse is covered under an employer sponsored retirement plan at work

  • No income limit to be able to fully deduct an IRA contribution

Single

Individual is covered under an employer sponsored retirement plan at work

  • Income limit to be able to fully deduct an IRA contribution - $60,000

Individual is not covered under an employer sponsored retirement plan at work

  • No income limit to be able to fully deduct an IRA contribution

There’s a reason the IRS limits the amount that can be deducted by someone who is covered under an employer retirement plan. The IRS tries to prohibit investors who are in higher tax brackets from sheltering “too much” income that won’t be taxed until funds are ultimately withdrawn upon retirement. 

You must also have earned income equal to or greater than the IRA contribution being made during the year in which the contribution will be coded.  For example, for someone to be eligible to make a full IRA contribution, their earned income from work throughout the year must be greater than or equal to $5,500, if under the age of 50, or $6,500 if over the age of 50.  Another important note – Social Security, pension benefits, IRA distributions, dividends, interest, etc. are NOT considered earned income items.  The IRS prevents retirees from contributing to qualified retirement accounts that grow tax-deferred unless they are working. 

In my next blog post, I’ll discuss ins and outs of contributing and withdrawing funds from an IRA where non-deductible contributions were made…this is where things can tricky.  Stay tuned. 

Nick Defenthaler, CFP® is a Support Associate at Center for Financial Planning, Inc. Nick currently assists Center planners and clients, and is a contributor to Money Centered and Center Connections.


The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person’s situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. C14-009199

Thursday
Apr102014

Elder Care Planning: Preparing an Aging Parent for Financial Capacity Challenges

 Financial capacity is one of the first abilities to decline as cognitive impairment appears, whether due to the slowing down in older age or a more specific dementia diagnosis.  Anyone with an elderly parent should be prepared to face the challenges that can come with diminished financial capacity. The first step in preparation is to understand what you and your mother or father may be facing. Quite literally, financial capacity refers to a person’s ability to manage money and financial assets in ways that meet a person’s needs and which are consistent with his/her values and self-interests.  Financial capacity includes basic skills like identifying and counting money, understanding debt and loans, handling cash transactions, paying bills, and maintaining judgment to act practically and avoid exploitation. Given that, for most of us, the loss of some financial capacity is inevitable, these are some risks and how to prepare your family:

Financial Management Challenges – most often, the ability to handle the day-to-day money management becomes a challenge.  This may mean that things like handling incoming checks and bills or balancing the checkbook become difficult.  In these instances, bouncing checks, not paying bills when they are due, and not filing tax returns are commonplace.  It goes without saying that this can cause a multitude of problems (not to mention, extra cost).

Fraud/Financial Exploitation -- more and more we are hearing about occurrences of financial fraud, with older adults being the most targeted victims. Financial fraud and exploitation can come in many forms, including but not limited to theft of checks (Social Security, pension, etc.), theft or unauthorized use of ATM or credit cards to access funds, and tax fraud.  Many times, a trusted friend, family member or caregiver is the one taking advantage of the older adult.

What can you do to prepare to help you and your aging parent avoid these potential risks?

  • Make sure to have an update General/Financial Durable Power of Attorney naming a trusted family member or friend in place. 
  • Consider having a Revocable Living Trust drafted that names a successor to handle things in the case of financial incapacity; appropriate assets should be titled in the name of the trust.
  • Get your aging parent to communicate with his or her current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) about money goals and values.  In addition, make sure all of his or her financial information is documented and organized in the case that someone needs to assist with financial matters in the future (consider a tool like our Personal Record Keeping Document and Letter of Last Instruction for this purpose).
  • Help facilitate an introduction between your parent’s current/future Power of Attorney and/or Successor Trustee (and appropriate family members or friends) to his or her  financial team (financial planner, CPA and estate planning attorney).  Make sure that each member of the professional team has authorization to talk to (1) other members of your professional team and (2) family members or friends that might assist in the future. 
  • Make sure that the chosen financial planner has a written Investment Policy Statement in place for managing your love one’s investment portfolio.  This written document outlines goals, risk tolerance, asset allocation preference and needs related to your parent’s investments. 

By working with a professional and personal team to plan ahead for the possibility of financial incapacity, you give yourself and your loved ones the best chance to avoid the risks to future financial independence.

This is the second in a monthly post (2nd Thursday of each month) that will address Elder Care planning topics.  If you have a specific question or issue you’d like addressed, please contact me at Sandy.Adams@CenterFinPlan.com.

Sandra Adams, CFP® is a Partner and Financial Planner at Center for Financial Planning, Inc. Sandy specializes in Elder Care Financial Planning and is a frequent speaker on related topics. In 2012 and 2013, Sandy was named to the Five Star Wealth Managers list in Detroit Hour magazine. In addition to her frequent contributions to Money Centered, she is regularly quoted in national media publications such as The Wall Street Journal, Research Magazine and Journal of Financial Planning.


Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

The information in this material does not purport to be a complete description of the issues referred to herein. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. You should discuss any legal matters with the appropriate professional. C14-009365

Tuesday
Apr082014

Winning Strategies Borrowed from the Game of Chess

 I learned to play chess when I was 8 years old.  The game always appealed to me because of the complex strategy and tactics involved.  Although I always enjoyed the game I never took it seriously until I was a little older.  After I graduated college and had a little money in my pocket, I decided to start competing in major tournaments and was very proud to win the state of Michigan Chess Championship in 2009 and 2011.  With this strong love and passion for the game of chess, it’s no coincidence that I ended up in finance.  There are several parallels between chess and finance, but here are a few of the most noteworthy.

Coordination of Pieces

In chess utilizing your pieces in a coordinated approach is one of the biggest keys to success.  To the amateur chess player this can be a very daunting task.  How could a knight, queen, bishop, pawn, and rook, which all move differently, be used in a coordinated, synchronized attack?  The exact answer to that could fill a whole book, but suffice to say it can be done. Similarly, in finance, think of all the moving parts to your personal situation and think of all the relevant questions that might stem from the various personal financial decisions.  Am I saving enough for retirement? When can I retire? What are the tax implications of my investments? Do I have enough Life Insurance? Do I have the right type of Insurances? Do I need a will and a trust? Should I have an emergency savings account and how much should be in it?  Am I maximizing my benefits at work?  These are just a few of the hundreds of potential questions that we at The Center answer on a daily basis. In chess terms we would say don’t consider moving one piece without considering what effect it will have on the rest of the army.

Patience and Discipline

Playing competitive chess at a high level you have to be very patient and disciplined.  If you’re too hasty you could easily squander your advantage.  It’s best to slowly improve your position until your army is as efficiently placed as possible.  In finance, especially with retirement investing, you have to be very disciplined to stick to your asset allocation in good times and in bad. 

Controlling Emotions

Let’s face it, money can be a very emotional subject.  However, making emotional decisions when it comes to money is seldom a good idea.  The same is true for chess.  It’s not unusual to find yourself in a difficult position where your opponent is throwing everything but the kitchen sink at you.  The emotional response is to give up and throw in the towel, but the true chess masters are able to control that natural human response and fight on.  I have had many beautiful games where I was dead lost, but I refused to give up, and ultimately was able to pull through. Many investors probably felt the same way in 2008 when it might have seemed the entire stock market was going to implode.  A lot of people couldn’t handle the emotions involved, and unfortunately moved to cash at the worst possible time. Those able to overcome the natural human response to flee to cash were probably in a better position when the market rebounded.

Team Game

Chess is a team sport.  Well not really…but I’ve found the biggest improvements I’ve made as a player have come when other professional chess players critique my games.  No matter how good you are, there is always room for improvement and ways to look at the same old positions in a different light.  The same is true in finance.  At The Center, each of our clients has a dedicated team of professionals to service their personal financial situation.  The lead financial planner, the support planner, and the client service associate are always making sure we are working as diligently as possible to help clients improve their overall financial position. 

You should never feel like a pawn when it comes to your financial plan. You are in control and with coordination, patience, control, and helpful advisors you can find a suitable strategy.

Matthew Trujillo is a Registered Support Associate at Center for Financial Planning, Inc. Matt currently assists Center planners and clients, and is a contributor to Money Centered.


Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Investing involves risk and investors may incur a profit or a loss regardless of strategy selected. C14-009192

Thursday
Apr032014

5 Steps to Being Cautious While Still Taking Life’s Chances

 In the arena of finance, risk is inherent.  Think about the risks you take everyday. When it comes to investment expectations there is always the risk that the outcome will be different than anticipated. When it comes to the income your family depends upon, there is always the risk of job loss. When it comes to budgeting, there is always the risk of inflation, which could leave you without enough to keep up with the rising cost of things around you. When it comes to your family, there is always the risk that someone could face a health challenge or a long-term illness.

Learning About Risk

After 25 years working with people, I have seen families lose children and grandchildren to tragedy.  I have witnessed divorce and marriage and have seen first-hand financial windfall and destruction. Helping clients through all this has helped me gain a better understanding of risk tolerance and realize that risk preferences vary greatly.  Most people want to avoid risk as much as possible, but many have to learn that the hard way.  Remember your first loss? The big one? How did it affect you? If it was truly the big one, then it made you sit up and take notice.  It left an impression on you and your decisions.  And it may have given you a deeper understanding of what risk really means. 

5 Steps to Managing Risk

Despite the fact that we all must learn to live with risk, there are steps we can take to help mitigate the downside when it comes to financial planning:

  1. Diversification, asset allocation and rebalancing: While this won’t make you rich quick, it should help reduce overall portfolio volatility. 
  2. Insurance: For a relatively small cost you can provide for the safety of a young and growing family for many years and provide protection in case of premature death or disability. 
  3. Emergency Funds: Always maintain the appropriate emergency balance for your situation.  A simple rule of thumb is 3-6 months of expenses. Then you may want to consider choosing investments that are marketable and liquid for your taxable portfolios.  
  4. Long-term Care Insurance: To avoid a catastrophic financial blow if a spouse develops a long-term illness and needs expensive health assistance, consider long-term care insurance when you’re in your late 50s. 
  5. Estate Planning:  By taking just a few minutes to write out a plan, there’s a better chance of things happening as you wish. Write a holographic will (handwritten and signed) or go to your state website and pull off the appropriate documents (like wills, powers of attorney, patient advocate designations, etc.). Complete them or set up a meeting with an estate planning attorney to help you with this process. 

If you need help getting started with any of these steps or making a personal plan to help you prepare for life’s inherent risks, contact me at matthew.chope@centerfinplan.com.

Matthew E. Chope, CFP ® is a Partner and Financial Planner at Center for Financial Planning, Inc. Matt has been quoted in various investment professional newspapers and magazines. He is active in the community and his profession and helps local corporations and nonprofits in the areas of strategic planning and money and business management decisions. In 2012 and 2013, Matt was named to the Five Star Wealth Managers list in Detroit Hour magazine.


Five Star Award is based on advisor being credentialed as an investment advisory representative (IAR), a FINRA registered representative, a CPA or a licensed attorney, including education and professional designations, actively employed in the industry for five years, favorable regulatory and complaint history review, fulfillment of firm review based on internal firm standards, accepting new clients, one- and five-year client retention rates, non-institutional discretionary and/or non-discretionary client assets administered, number of client households served.

Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute investment advice. Any opinions are those of Center for Financial Planning, Inc. and not necessarily those of Raymond James. Diversification and asset allocation do not ensure a profit or protection against loss. Rebalancing a non-retirement account could be a taxable event that may increase your tax liability. Investing involves risk and you may incur a profit or loss regardless of strategy selected. C14-005525