How Does a Roth 401(k) Work?

Most Americans have most of their retirement savings in a 401(k) plan or similar employer-sponsored retirement account, which is great. Your contributions to a 401(k) plan can decrease your taxable income today. However, eventually, when you take distributions from the account, you’re going to owe ordinary income taxes.

CNBC’s recent article, “A Roth 401(k) offers tax advantages. Here’s how it works” says that more employers are offering another option for your retirement savings—a Roth 401(k). When you contribute to a Roth 401(k), the contribution won’t lower your taxable income today. However, when you withdraw money in the future, like a Roth IRA, it’s tax-free. A Roth 401(k) lets you save much more than a Roth IRA. You can only contribute $6,000 to a Roth IRA, and if you’re age 50 or older, you can make an additional catch-up contribution of $1,000.

401(k) plans are more liberal with what you can save. The limit is $19,000 a year to a 401(k) in 2019, and Roth 401(k) plans share that limit. If you are over age 50, you can save an additional $6,000. However, the amount you earn also makes a difference. Roth IRAs have an income cap. You can’t contribute to a Roth IRA, if you earn more than $203,000.

The biggest negative with a Roth 401(k) is how contributions might affect your tax liabilities today. If you earn $100,000 a year and save $19,000 to a traditional 401(k), your taxable income would be only $81,000. However, by contrast, if you make the same $19,000 contribution to a Roth 401(k), you’ll still have taxable income of $100,000.

There are no tax consequences when you take money out of a Roth 401(k), when you’re 59½ and you meet the five-year rule. However, if you take a similar distribution from a traditional 401(k) plan, the money you withdraw is subject to ordinary income tax.

There are also required minimum distributions (RMDs). Roth 401(k) account owners have to take the RMD at age 70½. This is not for Roth IRA owners. Therefore, you may want to roll your Roth 401(k) account over to a Roth IRA account before you turn 70½.

If you are interested in learning more about IRA’s and 401 (k)’s click here.

Reference: CNBC (April 23, 2019) “A Roth 401(k) offers tax advantages. Here’s how it works”

Stolen Social Security Scam Reaches Epic Proportions

The volume of calls being made by scammers and the sheer audacity of their demands, seems to have reached record highs. This past December, the Federal Trade Commission issued a warning about the Social Security scam, noting that they have received more than 35,000 complaints. The calls keep coming in, as reported by AARP Bulletin in the article “How Social Security Scammers Tried to Swindle a Fraud Expert.”

The typical scam starts with a robocall that says that an enforcement action has been executed by the U.S. Treasury against your Social Security number, and that ignoring this would be an intentional attempt to avoid appearances before a judge for a federal criminal offense. The tone is very serious, and it’s a convincing script. A phone number is provided, so that people can call someone to help avoid being arrested.

One security expert put the scammers through their paces, calling the number and going through the process, with false names and account information, to learn first-hand how the scam operates.

The sophistication and calm demeanor of the scammer works well. The security pro gave a fake name, and his “file” was found immediately on the scammer’s system. He also provided a fake address and a fake Society Security number. Somehow the scammer confirmed all this information.

The scammer told the security expert that law enforcement agencies had found fraudulent bank accounts and crimes including money laundering, drug trafficking, and IRS scams linked to them. The expert was asked to confirm ownership of the 25 bank accounts, with a stern question: “Do you own these accounts, yes or no?”

The question is meant to cause fear and confusion. It works. When the security expert pretended to be flustered by the question, the scammer’s tone became helpful and kindly. He just needed to know exactly how much money his victim had and the numbers for the bank accounts. In that way, he would be able to help identify which of the accounts were real, and which were fake.

Once the supposed victim gave phony account numbers and told the scammer he had more than $85,000 in one of his bank accounts, the tone changed to attack mode. They told the security expert how many crimes there had been and how many federal counts there were against him. The possibility of 30 years of prison time was emphasized. There was another stern question, asking “Do you accept all of these allegations under your name?” The tactic makes an unsophisticated or frightened person feel, as if they are being scolded by an authority figure.  It works many times.

The scammer’s tone then shifts to that of a kindly friend, offering an opportunity to make things right. Part of that is the request for the caller to give the scammer the phone number for Social Security and the authority for the scammer to “clear his name.” The scammer even told his alleged victim that there are a lot of scams out there, and he didn’t want him to be a victim!

The alleged victim was told to go to the bank, withdraw all his money, and convert it to “government-certified bonds.” This was followed by a discussion of “government-certified stores” like Apple, Walmart, Target, CVS, as the source for gift cards. The “bonds” would never leave the victims hands. He just had to give the scammer the serial numbers on the cards, so they could “update your file.”

That’s where the money goes. The balances on the cards are transferred by number to the scammer’s accounts. The victim goes to the bank to “deposit” the cards, as they have been directed to do by the scammer, only to learn that they are worthless.

At this point, the security expert hung up, only to be called back more than a dozen times. He had learned what he needed to know, and now you do too.

When a robocall comes in, hang up. The government never demands payment in gift cards. If there was a warrant out for your arrest, there would be a police officer or federal marshal at your door, not on the phone. Unfortunately, many people, particularly seniors, do fall prey to these scams. This is why they continue. Be on guard, because even smart people are taken by these Social Security scammers.

Reference: AARP Bulletin (March 22, 2019) “How Social Security Scammers Tried to Swindle a Fraud Expert.”

What’s The New Top Retirement Destination?

Watch out, Florida, and step aside Arizona. CNBC’s recent article, “Retirees are flocking to these 3 states — and fleeing these 3 states in droves” says that New Mexico is the new top retirement destination.

Those were the results of a survey by United Van Lines of nearly 27,000 of its customers who moved last year, through Nov. 30, 2018. Among those who moved to New Mexico, 42% said they did so because of retirement, making the state a top destination. Good old Florida was second, with 38% of people moving there citing “retirement” as a reason. Then, Arizona followed in third.

On the flip side, retirement is also a main reason why people fled New Jersey, with a third of households citing that as a reason for leaving the Garden State. Maine and Connecticut were the next states people are moving away from for retirement.

There are a number of reasons why people near retirement might want to relocate. One of the biggest is the need to stretch their savings and their Social Security checks. A top reason for leaving California is more favorable income tax rates in other states.

Another consideration is how your destination state treats retirement income. These states tax Social Security: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah and Vermont.

In addition, there are other taxes to consider. For example, New Jersey has an effective property tax rate of 2.13%, which is the highest in the country. It also has a top individual income tax rate of 10.75%, which is applied to income exceeding $5 million.

Affordability is an important factor when deciding where to live in retirement. However, there are also other considerations. This includes whether you want to be close to nearby family and friends.

Before you pack up the moving van, take an extended visit in your potential retirement location. Get to know what your destination is like, before you settle down.

In addition, take a hard look at your finances to be sure your move is financially sensible, and ask your estate planning attorney to review your estate plans.

Reference: CNBC (April 17, 2019) “Retirees are flocking to these 3 states — and fleeing these 3 states in droves”

What is a Transfer on Death (TOD) Account?

Most married couples share a bank account from which either spouse can write checks and add or withdraw funds without approval from the other. When one spouse dies, the other owns the account. The dead spouse’s will can’t change that.

This account is wholly owned by both spouses while they’re both alive. As a result, a creditor of one spouse could make a claim against the entire account, without any approval or say from the other spouse. Either spouse could also withdraw all the money in the account and not tell the other. This basic joint account offers a right of survivorship, but joint account holders can designate who gets the funds, after the second person dies.

Kiplinger’s recent article, “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning,” explains that the answer is transfer on death (TOD) accounts (also known as Totten trusts, in-trust-for accounts, and payable-on-death accounts).

In some states, this type of account can allow a TOD beneficiary to receive an auto, house, or even investment accounts. However, retirement accounts, like IRAs, Roth IRAs, and employer plans, aren’t eligible. They’re controlled by federal laws that have specific rules for designated beneficiaries.

After a decedent’s death, taking control of the account is a simple process. What is typically required, is to provide the death certificate and a picture ID to the account custodian. Because TOD accounts are still part of the decedent’s estate (although not the probate estate that the will establishes), they may be subject to income, estate, and/or inheritance tax. TOD accounts are also not out of reach for the decedent’s creditors or other relatives.

Account custodians (such as financial institutions) are often cautious, because they may face liability if they pay to the wrong person or don’t offer an opportunity for the government, creditors, or the probate court to claim account funds. Some states allow the beneficiary to take over that responsibility, by signing an affidavit. The bank will then release the funds, and the liability shifts to the beneficiary.

If you’re a TOD account owner, you should update your account beneficiaries and make certain that you coordinate your last will and testament and TOD agreements, according to your intentions. If you fail to do so, you could unintentionally add more beneficiaries to your will and not update your TOD account. This would accidentally disinherit those beneficiaries from full shares in the estate, creating probate issues.

TOD joint account owners should also consider that the surviving co-owner has full authority to change the account beneficiaries. This means that individuals whom the decedent owner may have intended to benefit from the TOD account (and who were purposefully left out of the Last Will) could be excluded.

If the decedent’s will doesn’t rely on TOD account planning, and the account lacks a beneficiary, state law will govern the distribution of the estate, including that TOD account. In many states, intestacy laws provide for spouses and distant relatives and exclude any other unrelated parties. This means that the TOD account owner’s desire to give the account funds to specific beneficiaries or their descendants would be thwarted.

Ask an experienced estate planning attorney, if a TOD account is suitable to your needs and make sure that it coordinates with your overall estate plan.

Reference: Kiplinger (March 18, 2019) “How Transfer-on-Death Accounts Can Fit Into Your Estate Planning”

Are You Behind in Your Retirement Saving?

Can you believe that almost half (48%) of American households over the age of 55 still have no retirement savings? Even so, it’s better than previous years, according to the U.S. Government Accountability Office.

CNBC’s article, “These people are on the verge of retiring—and they have nothing saved,” says that the congressional watchdog group based its conclusions on an analysis of the Federal Reserve’s Survey of Consumer Finances.

In 2013, roughly 52% of households over age 55 had zero saved for retirement. While the over-55 crowd may have a big savings shortfall to make up, there are steps they can take. Let’s look at what they need to do.

Catch up on contributions to retirement plans: Workers can defer up to $19,000 in a 401(k) plan at work. Those employees who are over 50, can save an extra $6,000. Older savers can also sock away more money in an IRA, since the contribution limit for IRAs is $6,000 in 2019. people who are 50 and up, can save an additional $1,000.

Increase the funds in your health savings account: If you’re still working and have a high-deductible health plan at work, you most likely have access to a health savings account or HSA. HSA’s have a triple tax advantage: (i) you contribute money on a pretax or tax-deductible basis; (ii) your savings will accumulate tax-free; and (iii) you can take tax-free withdrawals to pay for qualified medical expenses. In 2019, participants with self-only health insurance can contribute $3,500. Those with family plans can save $7,000. Account holders age 55 and older can save an extra $1,000 in an HSA.

However, remember that when you’re enrolled in Medicare, you can no longer contribute to your HSA. However, you can use those funds to cover health-care costs in retirement.

Work a little longer and generate income: You could earn money from a part-time job to increase your income and ramp up your retirement savings.

If you get a raise, throw most of it into your savings account. If you get a raise to your pay at work, save two-thirds of it. Increase your 401(k) deferrals, so that you’re saving more of that pay increase.

Living on less than you make, is something that many people don’t learn until late in life—but as long as you are working, you can save.

Reference: CNBC (April 5, 2019) “These people are on the verge of retiring —and they have nothing saved”

How Big or Small Will Your Retirement Paycheck Be?

You’ve spent years saving for retirement, and maybe you’ve gotten that down to a science. That’s called the “accumulation” side of retirement. However, what happens when you actually, finally, retire? That’s known as the “deaccumulation” phase, when you start taking withdrawals from the accounts which you so carefully managed all these years. However, says CNBC, here’s what comes next: “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”

Unless you are a trained professional, like a financial advisor or a CPA, chances are good that you have no idea how to transform a lifetime of savings into a steady, tax-efficient income stream. A study for the Alliance for Lifetime Income asked pre-retirees, if they have done the math to figure out how much money they’ll need for retirement. About 66% say they haven’t done the calculations. Just 38% of households can count on having a pension or an annuity to provide a steady stream of cash.

In response to this common question, one company has launched a feature that was created to help you create a steady paycheck in retirement. The company, Kindur, was founded by a woman whose career included nearly two-decades in asset management at J.P. Morgan. She was inspired by her own experience helping her father decide how to draw down his assets. After devoting hours to Social Security books, she realized that technology could solve this problem. Throughout her career, she saw how financial institutions used technology to present and manage complex information. The goal of her company was to take this complexity out of retirement income planning.

Kindur, however, is not alone in this space. The founder of Social Security Solutions and Income Strategy found himself wishing there was a way to coordinate retirement income some ten years ago. He teamed up with the investment strategy chair at Baylor University, for what he thought would be a short project. In the end, it took years to sort through all the rules of Social Security. However, a platform was created to help people figure out claiming strategies. His second company analyzes   the accounts from which they should withdraw and when.

Another company, Income Strategy, provides users with help to figure out how to withdraw money and provides the option of how that transaction will be executed.

The future will likely hold more of these kinds of platforms, as the next generation becomes more comfortable with allowing AI (Artificial Intelligence) to manage their money and their withdrawals. For now, most people are still more comfortable with a person providing financial guidance, although that guidance is often helped by AI. Together, AI and an experienced professional make the best advisors.

As you plan for the future, remember to include the estate planning component. There have are many online legal drafting platforms, but so far, they have fallen short.

Reference: CNBC (April 7, 2019) “You probably don’t know how much your retirement paycheck will be. New technology is working to change that.”

What’s Going on in Congress with Alzheimer’s Legislation?

McKnight’s Senior Living reports in the article “Bill would aid those with younger-onset Alzheimer’s disease” that Senate Bill 901, also known as the “Younger-Onset Alzheimer’s Disease Act,” was introduced in the Senate by Senator Susan Collins (R-ME), chairman of the committee, Senator Bob Casey, ranking member, and Senators Doug Jones (D-AL) and Shelley Moore Capito (R-WV). Representatives Kathleen Rice (D-NY), Pete King (R-NY), David Trone (D-MD), Elise Stefanik (R-NY), Maxine Waters (D-CA), and Chris Smith (R-NJ) introduced the bill as H.R. 1903 in the House of Representatives.

Nutritional programs, supportive services, transportation, legal services, elder-abuse prevention and caregiver support have been available through the OAA since 1965. However, under the current law, only individuals over 60 are eligible.

“These programs would make a huge difference in the lives of individuals living with younger-onset Alzheimer’s disease, who don’t have support services available to them,” said hearing witness Mary Dysart Hartt of Hampden, ME, a caregiver to her husband, Mike, who has younger-onset Alzheimer’s.

About 200,000 individuals aged less than 65 have younger-onset Alzheimer’s disease, according to hearing witness Clay Jacobs, executive director of the Greater Pennsylvania Chapter of the Alzheimer’s Association, North Abington Township, PA.

“The need to reach everyone affected will grow significantly in the coming years,” he said.

Senator Collins was a founder and co-chair of the Congressional Task Force on Alzheimer’s Disease. She noted that she and Casey are leading this year’s OAA reauthorization efforts.

Senator Collins said she was also introducing the “Lifespan Respite Care Act” with Senator Tammy Baldwin (D-WI) Tuesday “to help communities and states provide respite care for families.” This legislation would earmark $20 million for fiscal year 2020, with funding increasing by $10 million annually to reach $60 million for fiscal year 2024. The program lets full-time caregivers take a temporary break from their responsibilities of caring for aging or disabled family members.

“Whenever I ask family caregivers, which included my own mother, about their greatest needs, the number one request that I hear is for more respite care,” Senator Collins said.

Reference: McKnight’s Senior Living (April 3, 2019) “Bill would aid those with younger-onset Alzheimer’s disease”

How are Baby Boomers Doing with Their Retirement Planning?
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How are Baby Boomers Doing with Their Retirement Planning?

The baby boomers—those born between 1946 and 1964, ages 55 to 73—have about half (47%) of their group already in retirement.

CNBC’s recent article, “Baby boomers face retirement crisis—little savings, high health costs and unrealistic expectations,” says that the Insured Retirement Institute’s annual report, Boomer Expectations for Retirement, highlights the fundamental issues of too little savings, underestimating healthcare costs and unrealistic expectations of how much retirement income they’ll actually need.

Too little savings. The three “legs” of the retirement “stool” are Social Security, private pensions and personal savings. These aren’t in great shape, as the average Social Security check is $14,000 a year, and just 23% of boomers ages 56-61 expect to receive income from a private company pension plan, with only 38% of older boomers expecting a pension. Most boomers haven’t saved nearly enough in their personal savings, with 45% of boomers having absolutely nothing saved for retirement.

Underestimating health care costs. Retirees frequently underestimate health expenses, especially long-term care costs. Many people don’t understand the system: half of the survey respondents say they haven’t calculated the cost of long-term care insurance, because they say they’ll rely on Medicare. However, Medicare has no coverage for long-term care. Just eight percent of boomers say they have purchased a long-term care policy.

Underestimating retirement income. The average amount spent by Americans 65-74 is $55,000 annually. However, most baby boomers don’t believe they’ll need near that amount. To that point, about 60% say they will need less than that on which to live. Their backup plan is to downsize, go back to work, or ask their children for help.

Of those who aren’t confident they did an adequate job preparing for retirement, the top two things they wish they’d done differently were to have saved more (63%) and to have started saving earlier (58%).

Reference: CNBC (April 9, 2019) “Baby boomers face retirement crisis — little savings, high health costs and unrealistic expectations”

What You Need to Know About IRS Impersonators

You get a phone call from an IRS impersonator who says he is from the Internal Revenue Service (IRS). He says that you owe back taxes and that the authorities will come and arrest you, unless you wire money or buy prepaid debit cards immediately. Of course, these callers are not with the IRS. They are thieves. These con artists target older Americans and bilk people out of millions of dollars a year. Here is what you need to know about IRS impersonators.

We only have hard numbers for the people who have reported the theft to the Treasury Inspector General for Tax Administration (TIGTA), so the total scope of the crimes is likely much larger. The TIGTA started keeping track of these cases in late 2013. Since then, more than 15,000 people have lost nearly $75 million to these illegal schemes.

The average amount stolen is nearly $5,000 per victim. One man paid the crooks more than $500,000. The agency knows of at least one person who killed himself after realizing he had paid money to the scammers.

Thankfully, the word is getting out about these con artists, and would-be victims are reporting the impersonators. More than 2.5 million people have contacted TIGTA to report suspicious calls from people claiming to be with the IRS.

What to Do If You Get a Suspicious Phone Call

The TIGTA agents say that if you get a phone call from someone who claims to be an IRS employee, just hang up. Do not engage in conversation with the person. Do not try to pull a prank on him or blow an air horn into the phone. Get off the phone immediately.

There have been several instances in which impersonators got angry at the people they tried to victimize and took revenge. They spoofed the phone number of the person they called and reported fake accounts to the police of violent criminal activity, like an armed home invasion happening at the person’s house. This behavior is “swatting,” named for SWAT teams that respond, sometimes with deadly force.

Therefore, hang up immediately and call the authorities. If someone called but you did not fall for the scheme, report the crook at the TIGTA website, tigta.gov. Call the TIGTA hotline (800-366-4484), if the con artists got some of your money.

What to Do If You Might Owe Back Taxes

The IRS contacts people by mail about delinquent taxes. They do not start the process, by telephoning people and threatening to arrest them, throw them in jail, or kick them out of their houses. The best thing to do if you are worried about whether you owe taxes, is to go to the IRS website, irs.gov, and ask them if you owe any back taxes. If you do, they will work with you and set up a payment plan. It will not involve going to WalMart to buy prepaid debit cards for the IRS.

Keep yourself safe from impersonators and financial predators. Do not anger them, but do not ignore the situation if you actually do owe taxes. Interest and penalties can add up quickly. You will sleep better at night, if you get a payment plan and know what to expect.

Your state’s regulations might be different from the general law of this article, so it would be a good idea to talk with an elder law attorney in your area.

References:

AARP. “Meet the Lawman Who Went After IRS Imposters.” (accessed April 11, 2019) https://www.aarp.org/money/scams-fraud/info-2019/timothy-camus-interview.html

 

When Should I Start My Estate Planning?

Only 42% of Americans have a will or other estate planning documents, according to a 2017 Caring.com study. Among parents of children under 18, only 36% have created a will.

USA Today’s recent article, “Estate planning: 6 steps to ensure your family is financially ready for when you die,” explains that if you die without a will, state laws will decide what happens to your property or who should be legally responsible for minor children. That might be OK in some circumstances, but in others, a grandchild with special needs might not receive the resources you want him to have, or an estranged family member might get your house.

For some reason, people believe that if they don’t do anything, things will “work out.” They often do not. Here is what you should consider:

Create a will. This document states who should get your money and possessions, as well as who would become a guardian to your minor children, if both parents die.

A living will. This legal document states what medical procedures you want or don’t want, if you’re incapacitated and can’t speak for yourself, such as whether to continue life-sustaining treatment. Powers of attorney let you appoint someone you trust to make legal, financial and health care decisions for you, if you are unable.

Trust. This is a legal entity that holds any property you want to leave to your beneficiaries. With a trust, your family won’t have to go through probate. Trusts also let you to set up instructions for how and when property is distributed. A trustee will manage the trust. Make sure you let people know, when you’ve designated them as a trustee. Name a secondary trustee, in case the primary trustee cannot or will not serve.

Beneficiaries. If you have investment accounts and retirement plans like a 401(k), make certain that the individual you’ve listed as the beneficiary is the person you want to receive those funds.  Remember to appoint a contingency or secondary beneficiary, just in case.

Work with an experienced attorney. Estate planning can be complicated, so get some professional legal help.

End-of-life planning isn’t really fun, but it’s necessary, if you want to have full control over your life and your assets.

Reference: USA Today (April 1, 2019) “Estate planning: 6 steps to ensure your family is financially ready for when you die”