Gantt Financial

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How to Reduce Taxes on Required Minimum Distributions (and do good)

How to Reduce Taxes on Required Minimum Distributions (and do good)

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Anyone who owns an IRA and is past age 70 ½ knows you have to make minimum withdrawals, known as RMDs (Required Minimum Distributions) each year, whether you want to or not. If you’re in a situation in which you don’t need the distribution for income, it doesn’t matter; you still have to take the distribution. If you don’t take the distribution, you face a stiff penalty of 50 percent on the amount of the RMD not taken. For folks who are fortunate to have large traditional IRAs, this event has the potential to create a rather sizable tax responsibility.

Not many people I know are excited about paying more taxes.  So is there a planning technique that may help with reducing the tax bite generated by RMDs? Fortunately, Congress passed a bill in December of 2015 called the Protecting Americans from Tax Hikes Act (PATH) that made permanent a technique known as a Qualified Charitable Distribution (QCD). QCDs were first allowed in 2006, but they were not permanent until the PATH Act of 2015. QCDs will enable you to make a charitable contribution from your traditional IRA and avoid taxes on the distribution, provided there are several rules you follow.

Qualified Charitable Distribution Rules

  1. You must be at least 70 ½ years old, which is when you are required to start taking RMDs, and the distribution must come from a traditional IRA, not from a SEP or Simple IRA.
  2. There is a limit of $100,000 per person each year for the QCD. Spouses filing jointly could potentially contribute up to $100,000 each, as long as they both meet all the eligibility rules and each QCD comes from his/her respective IRA’s.
  3. To qualify as a charitable contribution, the QCD must go to a qualified charity, as described in IRC Section 170(b)(1)(A). You can send the money as a direct transfer from the IRA custodian to the charity, or in the form of a check made payable to the charity. The QCD is not valid if the check is payable to the IRA owner, who then endorses it over to the charity.
  4. Any QCD must be completed by December 31. If the payment is made out to the charity, then the check should be deposited by December 31st to be considered completed. Therefore, it would be best to start the process of sending the QCD in time, so the charity receives the QCD and deposits it before December 31st.

It is important to note that the first distribution taken from an IRA in the tax year is deemed to go toward satisfying the RMD for the year. For example, if your RMD is $3,500, and you make a regular withdrawal in January of $3,500, then the withdrawal would all be taxable and would be considered to have satisfied your RMD for the year. In this example, if you later make a QCD from your IRA, it would not go toward satisfying your RMD.

Benefits of Qualified Charitable Distributions

  1. QCDs are not subject to the limitations of the 60/30 rule. In 2018 itemized charitable deductions will be limited to either 60 percent or 30 percent of your Adjusted Gross Income, depending on the type of charity. QCDs are not subject to this limitation.
  2. While QCDs do not generate any income, they aren’t counted as a charitable deduction either. QCDs are helpful because they reduce the likelihood of going above income thresholds that could push you into higher marginal tax rates. There are a number of different ways reducing overall income may help reduce taxes.
  3. Having lower combined income may reduce taxes on Social Security benefits. For individuals, if combined income is between $25,000 and $34,000, then you may have to pay income tax on up to 50 percent of your benefits. If combined is over $34,000, then 85 percent of your benefits are taxable. For married couples, the 50 percent taxable threshold is for a combined income of $32,000 up to $44,000, and the 85 percent threshold is for combined income above $44,000.
  4. Lower income may help reduce Medicare Part B premiums. For example, the Part B premium jumps from $134 to $187.50 per month in 2018 if modified adjusted gross income is above $85,000 for individuals, or $170,000 for married couples. Part B premiums increase even more for higher levels of income.
  5. Making a QCD may help avoid the 3.8 percent Medicare tax. This tax applies to taxpayers if their net investment income and modified adjusted gross income exceeds $200,000 for individuals or $250,000 for married couples filing jointly. However, this tax only affects about 2 percent of the population.

Conclusion

Because the standard deduction has been increased to $12,000 for single filers, and $24,000 joint filers for 2018, it may be more advantageous to claim your standard deduction instead of itemizing deductions. Charitable deductions comprise part of your itemized deductions, so you wouldn’t get a benefit from regular charitable contributions if you claim the standard deduction. So instead of taking RMDs as ordinary income, you may satisfy the RMD by making a QCD to your favorite charity, even if you claim your standard deduction.

If you are planning to make charitable contributions for 2018, the QCD is a great way to help reduce taxes on your RMDs at the same time.

You should not apply this information to your individual tax situation without consulting with a qualified tax adviser to determine whether this strategy is appropriate for your situation.

 

Disclosures

The views provided on this website are intended to provide the investor with an introduction to the company and its investment strategies.

Gantt Financial Advisors, LLC is registered in Alabama only. Nothing on this website should be construed as a solicitation or offer, or recommendation, to buy or sell any security, or as an offer to provide advisory services by the company in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. Information on this website is intended only for United States citizens and residents. Nothing contained on this website constitutes investment, legal, tax or other advice, nor should be relied upon in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. A copy of the company’s current written disclosure statement discussing Gantt Financial Advisors, LLC business operations, services, and fees is available from the company upon request.

Important Things to Know about Social Security Benefits in 2018

Important Things to Know about Social Security Benefits in 2018

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There are some important changes in Social Security for 2018 that may have an impact on your financial plans. Social Security remains an integral part of retirement planning, and for many Americans, represents a substantial portion of their retirement income.  Today, we will take a look at some of the changes for 2018.

Increase in Benefits

In case you haven’t heard, Social Security benefits will increase by 2 percent in 2018, which happens to be the most substantial cost of living adjustment since the early part of this decade.

Cost of Living Adjustments

For many people, most, if not all, of the cost of living adjustment will go toward increased Medicare Part B premiums. For new Medicare Part B enrollees, the premium was $134 in 2016 and 2017.

Social Security has a rule known as the “hold harmless” rule, which prevents an increase in Part B premiums from causing a reduction in a recipient’s Social Security benefit.  Therefore, the cost of living benefit increase this year means an increase from the roughly $109 in Part B premiums many Social Security recipients have paid in the past, according to the Center for Medicare and Medicaid Services.

Increase in the Maximum Benefit Payable

It’s pretty easy to see that the more you pay in, the more benefits you may receive. There is a limit on what anyone may receive because Social Security has an earnings cap on the annual amount of earnings that may be taxed. This cap goes up a little most years and is based on increases in the national average wage index.

In 2017, Social Security increased the cap from $118,500 to $127,200, a 7.3% increase. As a result of the increase in 2017, those who are fortunate to be higher earners have seen an increase in the maximum Social Security benefit possible from $2,678 a month to $2,788 a month at Full Retirement Age, which represents a 3.7% increase from 2017. The average benefit paid by Social Security in 2018 is $1,372 per month, so not very many people are affected by this change. By the way, your Social Security benefit is calculated based on the highest 35 years of earnings. If you are earning more as you get closer to retirement, you are replacing the lower earning years with higher earning years that will be used in the highest 35 years to calculate your Social Security benefit.

Reduction in Benefits While Working

Did you know that if you are still working and claim your Social Security benefits before Full Retirement Age (FRA), your benefits are reduced if your income is above a certain level? To learn more about your FRA, you can visit the Social Security Administration website for more details.

If you are younger than 66 in 2018, you can earn up to $17,040 in 2018 without having a reduction in benefit  Anything over that income amount and your benefit will be reduced by $1 for every $2 over the income limit of $17,040.

If you turn 66 in 2018, the reduction in your benefits is relaxed. In this latter case, you are allowed to earn up to $45,360 without losing any of your Social Security benefits. If you’re earning over that amount, then your benefits are reduced by $1 for every $3 over the limit of $45,360 until you reach your birthday. The good news is there is no reduction in benefits once you reach your FRA.

Increase in Taxable Earnings

Social Security is funded by a tax paid on earned income imposed by the Federal Income Contributions Act (FICA). The tax rate of 6.2 percent remains the same for 2018.

In 2017, workers only had to pay Social Security tax on the first  $127,200 of earned income. In 2018, workers will pay tax on the first $128,400 of income. This will result in an increase in the payroll tax of $74.40 for a person with an income of $128,400 in 2018. The increase in 2018 is substantially less than the 7 percent increase in the earnings cap imposed in 2017.

Higher Medicare Premiums

If you earn a high income in Medicare Part B, you will have to pay more for your Medicare Part B premiums in 2018.

If you are an individual with Modified Adjusted Gross Income (MAGI) between $133,500 and $160,000, your total premium will increase from $267.90 a month to $348.30 a month.

For couples with MAGI above $428,000, the combined Part B premium will be $10,286.40. The surcharges are based on MAGI reported on your 2016 tax return.

Conclusion

There are some skeptics out there who believe we just can’t count on Social Security in the future, perhaps justifiably so.  It has been known for some time that the Social Security Administration is projecting that future benefits will be reduced to around 77 percent of the current benefit beginning in 2034. While this news may be troubling, it’s not the first time Social Security has faced similar issues. In 1983, Congress made some changes that gradually increased the FRA from 65 to 67, and started taxing benefits above certain levels of income. I believe the good news is that Congress will act in the future to make similar changes to ensure Social Security will be viable for future generations.

Making good decisions about Social Security is crucial because, for so many people, it represents a major portion of their retirement income. Fortunately, there are a number of good strategies available to enhance your benefits. We love to help people get the most out of their Social Security benefits, so give us a call and let’s talk.

 

Disclosures

The views provided on this website are intended to provide the investor with an introduction to the company and its investment strategies.

Gantt Financial Advisors, LLC is registered in Alabama only. Nothing on this website should be construed as a solicitation or offer, or recommendation, to buy or sell any security, or as an offer to provide advisory services by the company in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. Information on this website is intended only for United States citizens and residents. Nothing contained on this website constitutes investment, legal, tax or other advice, nor should be relied upon in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. A copy of the company’s current written disclosure statement discussing Gantt Financial Advisors, LLC business operations, services, and fees is available from the company upon request.

Money Moves Teachers Should Consider Before Retirement

Money Moves Teachers Should Consider Before Retirement

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As an educator, you have a unique set of financial considerations that don’t affect other professionals.

Teachers may be eligible for a state-sponsored pension plan. These pension programs vary by state and eligibility is usually contingent on years of service, but they are specifically created to help teachers with retirement planning. And even if you are eligible for a pension, do you know if it is going to provide you with enough income in your retirement years? Now is a good time to find out.

Preparing for retirement as a teacher takes the same thoughtful financial planning as any other individual planning for retirement. However, the added complexity that comes with managing your pension benefits and the other financial tools you have access to can lead to potential missteps if you aren’t careful.

Considerations Concerning Your Pension

  • Know How Long You Are Required to Work to Receive the Full Amount of Your Pension

If you retire too soon, you may not receive the full amount of your pension. Most, if not all, pension programs require a certain amount of years of service in order to receive the full pension amount. The Teachers’ Retirement System has what is known as a ‘cliff’ when it comes to vesting. The cliff merely refers to the amount of service credits required to qualify for a lifetime pension.

Being aware of your service credits prior to retirement will help ensure that you don’t retire without satisfying the minimum of 10 years of service credits. Learn the rules of your specific pension program so that you can plan your retirement accordingly. In the state of Alabama, for instance, The Retirement Systems of Alabama offers retirement resources to teachers so that you can fully understand your service benefits. Here’s what you need to know if you are a teacher in Alabama.

Tier I versus Tier 2 Employees in The Retirement System of Alabama

Tier 1 plan member: Any member of the Retirement System who received service credit in the Employees’ Retirement System or in the Teachers’ Retirement System prior to January 1, 2013.

  • You have at least 10 years of service credit and have attained the age of 60.
  • You have accumulated 25 years of service credit at any age.

Tier 2 plan member: Any member of the Retirement System who first began eligible employment with an Employees’ Retirement System or the Teachers’ Retirement System on or after January 1, 2013, and who had no eligible service in the Employees’ Retirement System or the Teachers’ Retirement System prior to January 1, 2013.

  • You have at least 10 years of service credit and have attained the age of 62.

If you are a Tier 1 employee, you contribute 7½ percent of your earnable compensation. Your pension is based on the average of the highest three years out of your last 10 years of employment. This number is then multiplied by the number of years of employment, times a benefit factor of approximately 2 percent.

To calculate your full benefit, you take the Average Final Salary x Years and Months of Service x Benefit Factor ÷ 12 = Maximum Monthly Benefit.

Example:

Average Final Salary: $42,000

Service Credit: 27 years and 6 months

Age 62

$42,000 x 27.5 x 2% ÷ 12 = $1,925 per month

 

If you are a Tier 2 employee, you contribute 6 percent of your earnable compensation. Your pension is based on the average of your highest earning 5 years out of your last 10 years of employment, multiplied by the number of years of employment, times a benefit factor of 1.65 percent.

 

Example:

Average Final Salary: $42,000

Service Credit: 27 years and 6 months

Age 62

$42,000 x 27.5 x .0165 ÷ 12 = $1,588.13 per month

 

  • Take Advantage of a Defined Contribution Plan

The type of retirement plans we discussed above are known as Defined Benefit Retirement Plans (DB). The amount paid to a retiree under such a plan is typically based on a fairly simple formula like the one I shared previously. It takes into account the years of employment and the employee’s compensation during the last few years of service.

Defined Contribution (DC) Plans, on the other hand, are designed to build assets that are owned by the individual with the intent that those funds would be used to supplement retirement in whichever fashion the retiree chooses.

The most well-known variety of a Defined Contribution Plan is the 401(k) in the private sector. Other types of DC plans are commonly known as 457(b) and 403(b) plans and are the most widely utilized DC plans for teachers and other municipal employees.

The biggest advantage of a 457(b) plan over a 401(k) plan is that there is no 10 percent penalty for withdrawals prior to age 59½. but you would still have to pay ordinary income tax on the withdrawal. A second advantage for the RSA 457 plan is the ability to make larger than normal deferrals in the last 3 years of service before retirement. If you did not defer the maximum deferral amount in the years beginning with 1986 and were eligible to participate, you may “catch-up” unused eligible amounts for one to three years. This is only possible if you are within three years of normal retirement age and are eligible for an unreduced pension. The maximum annual deferral is $36,000 in 2017. The normal maximum deferral for a 401(k) for a person age 50 or older is limited to $24,000.

The Retirement Systems of Alabama offers a 457(b) plan known as RSA-1.

Understanding the Benefits of Your 457(b) and 403(b) Plans:

  1. You don’t pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Allowable contributions to a 457(b) plan are either excluded or deducted from your income.
  2. Earnings on the amount in your 403(b) or 457(b) aren’t taxed until they are withdrawn
  3. You are allowed to defer up to $18,000 per year of salary in 2017 if you are under the age of 50. Anyone 50 or older may defer up to $24,000 in 2017.
  4. A 457(b) or 403(b) plan may be used to bridge the gap between: a) leaving employment and later becoming eligible to draw retirement at age 60 or 62, or b) the gap if you begin retirement before you are eligible for Social Security benefits.

  • Utilize Tax-Efficient Investment Tools

If you decide not to make tax-deferred contributions to a Defined Contribution plan like a 457(b) or 403(b), then you may still be able to contribute to another type of tax-advantaged plan known as a Roth IRA. You would normally set this type of plan up as an individual, outside your teacher retirement plan.

Funds like this work to supplement your regular retirement account, and the gains grow tax-free. Roth IRA contributions are made in after-tax dollars, which means that you pay tax on your principal contributions (when you put money into the account), but qualified distributions will never be taxed.

Current rules for this tax-efficient vehicle for the 2017 fiscal year include:

  • Modified gross income limit: single individual must earn less than $133,000, couples filing jointly must earn less than $196,000.
  • Maximum contribution limit: single individual is capped at $5,500, the contribution limit is $6,500 for individuals over the age of 50.

  • Plan for What Comes After Your Teaching Career

Knowing what comes next is a natural step toward a comfortable retirement. This is especially true if you retire before you begin collecting your retirement benefits.

If there is going to be a gap between retirement and when you begin receiving distributions, you’ll need a way to bridge the income gap. Knowing the tools available to help bridge this gap is essential. Some teachers can accomplish this via non-retirement investment vehicles, while others decide to work in some other field after they leave the classroom. In either case, having a plan makes all the difference.

Conclusion

Information is one of your best resources when planning for your retirement. Know that as a teacher you have many retirement tools available to you that are intended to help you retire successfully. Leveraging these tools to maximize your chances for success is an opportunity you have today.

You have worked hard to be able to retire comfortably. Having a plan and sound guidance can help make this transition financially worry-free. If any of these topics raise questions for you, we would love to talk to you about ways we can help with making good decisions about planning for and transitioning to retirement.

 

Disclosures

The views provided on this website are intended to provide the investor with an introduction to the company and its investment strategies.

Gantt Financial Advisors, LLC is registered in Alabama only. Nothing on this website should be construed as a solicitation or offer, or recommendation, to buy or sell any security, or as an offer to provide advisory services by the company in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. Information on this website is intended only for United States citizens and residents. Nothing contained on this website constitutes investment, legal, tax or other advice, nor should be relied upon in making an investment or other decision. You should obtain relevant and specific professional advice before making any investment decision. A copy of the company’s current written disclosure statement discussing Gantt Financial Advisors, LLC business operations, services, and fees is available from the company upon request.