Fiduciary Is Fun!
(a.k.a. I heart taxes)
(a.k.a. I heart taxes)
Apparently, Required Minimum Distributions (“RMDs”) are a lot harder than you would think. A new survey from TD Ameritrade finds that only 38% of Americans actually know that RMDs are required from tax advantaged qualified retirement accounts, e.g. IRAs, 401ks. And if we are to believe that the Baby Boomers are retiring at the rate of 10,000/day, it’s safe to say that this could become an issue in the not too distant future.
Not taking RMDs is a problem because the penalty for missing one is 50% of the amount that should have been with withdrawn, in addition to the income tax due! If that seems like a pretty steep penalty, that’s because it is! The good news is that these accounts are generally at financial institutions that are aware of the need to make the RMDs and notify the individual of the amount that needs to be withdrawn. Nevertheless, this doesn’t necessarily always mean things go well
For example, do you know when you MUST begin your first RMD? The first one is due by April 1st of the year FOLLOWING the year in which you turn 70 1/2. That’s all well and good, and many people (or at least some people) actually know this. A problem can surface, however, if you wait until April 1st because delaying doesn’t mean you don’t need to take another distribution by December 31st of that same year. Consequently, you could get two distributions in one year which could do some things to your tax bill that you would rather not happen.
Another common challenge folks face is when they have multiple tax advantaged accounts – IRAs, old 401k balances, etc. Any idea how to calculate what is required there? The math isn’t necessarily that hard, but the actual distributions can be tricky. For instance, if you have multiple IRAs, you can take the total required distribution from 1 IRA or mix it up. No problem as long as the total for the IRAs is distributed. Does it work the same for 401ks? Nope, it does not. Each 401k account stands on its own. How about 403b balances left with old employers. Seems like they should be treated like 401ks, right? Wrong. Now we are back to the IRA method. Don’t worry, if you get it wrong the penalty is only 50%!
There is some legislation that will be changing the RMD rules again if it gets passed this year, which seems like a real possibility. Will the new rules make things less complicated? Maybe…maybe not. You should probably talk to a professional about this. You should probably talk to me.
Give me a call and let’s have conversation.
Pete Welsh aka 401kGuy
There are many ways for a small business owner to fund retirement. Although according to US News in a survey done in 2018, 34% of all small business owners had saved nothing for retirement. That’s not good. And interestingly, 42% of small business owners, according to The Motley Fool, June 2018, are counting on the sale of their business to constitute a major source of retirement income. That’s seems like a pretty big bet to me. Who is going to buy those businesses again?
So what might a small business owner do with respect to planning for retirement? In most pass-through tax entities – S-Corps, Partnerships, and LLCs – the most viable, tax advantaged way to plan for retirement is through a qualified retirement plan. The amount that can be contributed to a defined contribution plan is dependent, in large part, on the owners earned income, but can be as high, for 2019, as $56,000 or 25% of wages, whichever is less.
In working with smaller companies, I often see an owner trying to maximize the contribution at $56,000. Simple math says that $56,000 is 25% of $224,000. In other words, if an owner pays himself anything more than $224,000 in wages, he is not getting any benefit as far as his defined contribution plan is concerned. He would be better off taking amounts above $224,000 as passive income, if that is an option, and paying taxes at a lower rate.
However, if there is a spouse gainfully employed, or a spouse that could be so employed, there could be an argument that we should pay the spouse some of the income that might have otherwise gone to the owner above $224,000. Why would we do this? Those additional wages going to the spouse are now earnings that can be considered for our 25% limitation. We can’t give our owner any more contribution, but if we pay the spouse $100,000, for example, we could make a contribution of up to $25,000 into her account
As you might expect, there are many considerations that must be factored in before we rush to take the action noted above. The additional payroll taxes for the spouse might be steep. But then again, getting a benefit from Social Security might be good. Who knows? The additional $25,000 deduction good, right? Lots to consider. Make sure you work with someone qualified and experienced to walk you through the pros and cons around these scenarios.
In fact, work with me.
The 2018 tax filing year is over for most, but many owners, partners, and members of pass through tax entities are still on extension as they try to make sense of all the tax changes that went into effect for 2018. Many partners and LLC members are still trying to understand what the Tax Cut and Jobs Act of 2017 has done to their net income and taxes. While there were a number of positive changes for high income earners there were also some caps, particularly in the areas of State and Local Taxes (“SALT”).
For those individuals who might be looking at a tax bill that is larger than what was expected, the question could be asked “what can we do now?” The general answer is “not much”, but there is one area of planning that is still available post the close of the year, assuming you are on extension, and that includes making profit sharing contributions to your retirement plan. Such contributions can have a meaningful impact, potentially, on Qualified Business Income (“QBI”) and the available 20% income deduction. These situations are extremely fact dependent, obviously, and everyone’s situation does vary.
There are many ways to make contributions, but for partners and LLC members, the calculation is more than a little complex to say the least. The IRS did create a 21 Step Process for calculating your earnings and your deduction in Publication 560 to help make it a little easier for you. Suffice to say, however, it’s not that easy. But given the importance in getting this tax deduction contribution correct, you should consult an expert.
For those of you looking to explore your tax planning options with your retirement plan and to understand how those changes will impact your personal situation, please reach out to us for a free consultation. We work collaboratively with your tax and legal advisors to get you the maximum deduction.
Pete Welsh aka 401kGuy
Can you handle an emergency? What kind you might ask. What if I said it were an emergency that would cost you $400 from your cash or savings account. Could you handle that? According to a new study by the Federal Reserve that was published this May, 2019 if you are like 4 out of every 10 Americans, you could not. You couldn’t do it; couldn’t come up with $400. About 1/3rd of the people surveyed said they would need to borrow or sell something to raise the $400, and 12% said they couldn’t pay it all.
We are enjoying an unprecedented, strong economy (bull market for over 10 years), low inflation, strong jobs market, rising wages, and we still have 40% of Americans unable to cover a $400 emergency from cash. From my standpoint, this is troubling news, but do you want to hear the real head scratcher from my standpoint? According to the same report, over three quarters (75%+) of all adults report that they are “doing OK” or “living comfortably” when asked about their economic well-being. This is the same group of people that had 40% of them unable to pay a $400 emergency! News Flash – if you don’t have $400 for an emergency, you are not “doing OK”!
So, what should we do here? Should we shame these folks? Of course not. Should we pay them more money? Who thinks that is going to solve the problem? I guess we could simply ignore the problem and be thankful this is not us? Or is it? Wait let me check.
The better alternative is to teach solid money management skills. Few young adults get basic skills taught to them anymore and are left figuring these things out for themselves, where they have varying degrees of success. The challenge is how to do this in a cost effective manner? The answer – the workplace. If you are an employer interested in helping your employees learn some of the basics of cashflow and budgeting, give me a call and we can talk about setting something up. Afterall, do you find it concerning that 4 out of every 10 of your employees do not have $400 for an emergency?
The technology arms race for the financial attention of individuals and employees has never been greater. Not a day goes by that I do not see another press release or receive an email about how some financial services company is introducing a new website, or new tool, or new behavioral finance gobblegook that will revolutionize the way Americans “save and prepare for their retirement.”
To believe the hype is to believe that the average American is more engaged and prepared than ever before to save confidently on his journey to financial nirvana. Is that how it is?
According to some new research by the National Association of Retirement Plan Participants, an organization that makes “financial information transparent and universally accessible for the 145 million working Americans” we are still a wee bit away from nirvana.
Despite the plethora of new tools offered by financial institutions, it appears that only 11% of people have any generalized level of trust in them. Additionally, despite all these new tools, only 43% of employees are satisfied with the education services provided by their 401k provider and engagement is decreasing across all channels of website usage. Only 18% of employees feel comfortable planning for retirement, and only 33% of them have even tried to reduce debt or make a budget.
What the heck is going on here?! We are living in a golden age of new tools for people and across all mediums the tools are being used less and less resulting in greater financial stress and less confidence. The problem? Technology alone is not the solution.
Technology is part of the answer, but it can never be expected to be the total solution. When I see all these new tools, I concede they are great. But by themselves, they are only a starting point. Financial planning, indeed life, is too complicated to expect people to turn en mass to only electronic tools for answers.
A better solution? Pair these marvelous tools with a competent and skilled financial advisor if you really want to move the needle. The combination of advisor and technology can really deliver some powerful results. Want to learn how? Give me a call to discuss!