Leveraging Gift Rules During Retirement

Leveraging Gift Rules During Retirement

Wish to transfer some of your assets to your children or grandchildren tax-free? Understanding the annual gift limits is a good place to start

Leveraging Gift Rules During Retirement

As you or family members approach retirement years, it is important to have a basic understanding of the IRS gift giving rules. With this understanding, there are opportunities to leverage this tax law without creating a tax problem.

The rule

You may give up to $14,000 to any individual (donee) in 2016 and avoid any gift tax filing requirements. If married you and your spouse may transfer up to $28,000 per donee. If you provide a gift to your spouse who is not a U.S. citizen, the annual exclusion amount is $148,000. Gifts in excess of this annual amount trigger the need to file a gift tax form with your individual tax return. The excess gift amounts are then added to your estate for potential estate taxation. The estate tax currently has a maximum rate of 40% and the donor of the gift (or their estate) is responsible for paying the associated tax.

Using the rule to your advantage

The unsaid gem within this tax law is this: You can transfer up to $14,000 ($28,000 if married) to anyone you wish each year tax-free. Additionally, most states also adhere to this federal law. So if you wish to move assets to loved ones without the burden of future taxation, consider the following ideas.

Make periodic gifts. Remember the gift-giving limit is per calendar year. To take full advantage of this tax-free transfer, consider starting now and make periodic payments. Every year you miss out on this annual limit reduces the amount a couple can transfer tax-free to each individual donee by up to $28,000 per year.

Fund college saving. Consider donating money into 529 College Saving plans for children and grandchildren. This can be done with automated deposits into the account. The account could be established by you or your grandchild’s parent.

Pay direct. If you are concerned about exceeding the annual limit for gifts to a single person, consider paying bills directly. Examples of this strategy might be paying medical bills directly to a hospital or directly paying college bills for a loved one.

Leave a cushion. Remember the annual limit. If you provide a gift for the maximum allowable to an individual, you may not provide any other gifts to this person during the year or the event would be deemed excess gift giving and require filing a gift tax form.

Property too. Gifts can include property as well as cash. You can donate investments or other physical property. If you do this, document the fair market value of the property when you transfer it. The IRS is requiring this documentation to ensure the value of the property transferred is consistently valued by you and the person receiving the gift.

Building a down payment. Often children burdened with college debt cannot afford to save the down payment required to own their first home. You can aid in this by helping build a down payment through gift transfers.

Keep it in perspective

Understanding and leveraging the annual gift tax rules can create tremendous tax savings. But this strategy should be done in conjunction with understanding your personal financial needs. Providing gifts of funds that you might later need for your own retirement can be problematic. It is best to review your gift plans prior to taking action.

Retirement Basics: Understanding Tax Efficiency

Retirement Basics: Understanding Tax Efficiency

Managing your taxable income during retirement can be complicated. Social Security Retirement benefits, retirement plan distributions and supplemental income can quickly impact the amount of tax you must pay. Here is something to consider.

One of the basics in retirement is to be as tax efficient with your income as possible. In 2016, income tax rates range from 0 – 39.6% plus a potential 3.8% net investment tax. Understanding how these progressive tax rates apply to ordinary income creates a tremendous retirement planning opportunity.

Many retirees can control their taxable income each year by the amount they work and how much they withdraw from retirement savings accounts like IRAs and 401(k)s. When your income drives you into a higher income tax rate, you will need to decide if you want to maximize the tax rate applied to this range of income.

Example: Assume you are a single taxpayer with $10,000 in retirement income from a part-time job. You also have $150,000 savings in a 401(k) retirement account. Also assume you are old enough to not have taxable Social Security Retirement benefits. The income range and applicable tax rate for a single taxpayer in 2016 is…

10% $1 – 9,275
15% 9,276 – 37,650
25% 37,651 – 91,150
28% 91,151 – 190,150
33% 190,151 – 413,350
35% 413,351 – 415,050
39.6% Over $415,050

In this example, excluding other variables, you have the opportunity to withdraw an additional $27,650 from the 401(k) at an income tax rate of 15%. Income beyond this amount will be taxed at 25% or higher.

*Note: Taxable income typically includes wages, interest, non-qualified dividends, short-term capital gains (assets owned for one year or less), and withdrawals from most 401(k), 403(b), and non-Roth IRAs.

It is never simple.

Unfortunately, planning for tax efficient retirement is never simple. There are other things to consider.

  • Your age
  • The taxability of your Social Security Benefits
  • Income phase-outs of other tax benefits
  • Required Minimum Distributions from retirement accounts at age 70 1/2 or older
  • Your state tax situation
  • Other taxes. Unfortunately, the tax code is not only based on income taxes. It also includes estate taxes, inheritance taxes, qualified dividend taxes and long-term capital gain taxes to name a few.

What to do?

Making tax efficiency an integral part of your retirement plan can be complicated. But for those willing to start early, spend the time and ask for assistance, the rewards are tremendous.


Avoid These Five Retirement Planning Mistakes

Avoid These Five Retirement Planning Mistakes

Retirement planning and tax planning go hand in hand. Here are five common retirement planning mistakes and ideas on how to ensure they do not happen to you.

Here are five common retirement planning mistakes and steps you can take to avoid them.

1. Not having a plan

Surprisingly most of us do not know how much money is needed for our retirement years. A retirement plan should consider how long you expect to live, create an estimate of the amount of money you will need, and consider your desired lifestyle during retirement. Your plan should have measurable goals that can then be broken down into a reasonable way to reach them. Thankfully there are many tools and advisors to help you figure this out.

Action item. If you have a plan, review it for possible revisions. If you do not, consider getting one put together as soon as possible.

2. Not starting early enough

One of the most powerful tools for a well-funded retirement is to start saving for your retirement at an early age. The sooner you start saving the better off you will be.

Action item. Open a retirement account and start saving. Increase the percent of your pay that you place in tax-advantaged retirement saving accounts. This includes IRAs, 401(k)s, and other plans.

3. Not maximizing employer contributions

Many employers have plans available to help their employees save for retirement. If your company has a pension plan, understand how it works and how much you can expect to receive upon retirement. If your company has a retirement plan contribution-matching program, take full advantage of this free money by making minimum contributions to avail yourself to this employer funding.

Action item. Review your employer provided retirement saving options. Maximize the benefits they are providing.

4. Taking the all or nothing approach

Do you plan on working during retirement or avoiding work at all costs? Do you plan on having a pension or Social Security covering all your retirement needs or none of it? Too often retirees plan the extremes, but reality is something in between. For example, if you are someone who plans to have your pension plan fail and Social Security go broke, you may be taking too conservative an approach. Realistically these fund sources will be contribute something to your retirement.

Action item. Create a range of retirement funding scenarios, not just the worst case or best-case scenario. Consider no work or part-time work. Consider some contribution from Social Security and potential pension income if your employer has a program.

5. Not understanding the true nature of your retirement

Are you being realistic in your future retirement plans? Have you correctly estimated the cost of health insurance? Have you really thought about the impact of relocating to a warmer climate? How important is living close to family and friends? Will you really downsize your home after the kids leave?

Action item. If you have a retirement plan that includes relocating or traveling to far off places, consider test-driving this change before you implement it. You may be surprised at the result.

Retirement should be something to look forward to, and with a little planning it can be a reality for most of us.

Supplement Your Retirement Outside Retirement Savings Accounts – Five great ideas

Supplement Your Retirement Outside Retirement Savings Accounts – Five great ideas

In addition to Social Security, retirement accounts are a primary resourse for income when you retire. But these aren’t the only tax advantaged tools available to you. Here are five other great ideas to supplement your retirement income.

The tax code is very specific in helping you save for retirement through use of IRA’s, 401(k)’s, 403(b)’s, and benefit accounts. However, there are other tax savings to be had if you know where to look. Here are some tax-advantaged ways to earn more during your retirement.

  1. Rent your home. You can rent your home for up to 14 days each year tax-free. For example, with proper planning you can arrange to rent out your home while you are away having fun or visiting grandchildren.
  2. Maximize your earnings. Each year you can earn some income and still stay below your taxable income threshold. Be careful here, as you may inadvertently make some of your Social Security Benefit taxable. You will also need to account for any minimum required retirement account distributions.
  3. Leverage your Roth distributions. Roth IRA’s and Roth 401(k) distributions are not taxable as long as you abide by the account rules. Consider this in your planning to reduce distributions from taxable retirement accounts.
  4. Use volunteerism instead of taxable income. If you plan to travel in retirement consider ways to volunteer at desired destinations in lieu of paying for food or lodging. Many national parks and other vacation destinations look for retirees to help manage campgrounds and scenic places. The free lodging and other benefits can save hard earned income that has already been taxed.
  5. Consider moving. With the wide array of state income tax rates, there are often lower cost options available to you. States like South Dakota, Florida, Texas, Nevada, Wyoming, Washington, Alaska, and New Hampshire have no state income tax. Be careful as this tax saving technique often has trade-offs and requires you to establish residence in your state of choice. These trade-offs can include high sales taxes, distance from family members and friends, and lack of trusted service providers.


Plan Your 2014 Retirement Contributions

With the setting of contribution limits to qualified retirement plans for 2014, now is a good time to plan for your 2014 retirement contributions.

As part of your planning for next year, now is the time to review funding your retirement accounts. By establishing your contribution amounts at the beginning of each year, the financial impact of saving for your future should be more manageable. Here are annual contribution limits for the more popular programs:

2014 2013 Change Age 50 or over
to catch up
IRA: Traditional $5,500 $5,500 none add: $1,000
IRA: Roth $5,500 $5,500 none add: $1,000
IRA: Simple $12,000 $12,000 none add: $2,500
401(k), 403(b), 457 plans $17,500 $17,500 none add: $5,500

Take action

If you have not already done so, please consider:

  • reviewing and adjusting your periodic contributions to your retirement savings accounts to take full advantage of the tax advantaged limits
  • setting up new accounts for a spouse or dependent(s)
  • using this time as a chance to review the status of your retirement plan
  • reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and pre-paid medical savings plans like HSAs (Health Savings Accounts)

While the annual limits did not go up for these plans in 2014, it is still a good idea to review your funding plans for your retirement.

2014 Social Security Benefits Announced

Social Security recently announced planned benefit increases for 2014. Now is the time to plan for these changes.

The Social Security Administration recently announced monthly social security and supplemental security income benefits (SSI) will increase in 2014 by 1.5%. This increase is based upon the Consumer Price Index over the past 12 months ending in September 2013. In addition, other figures based on the national average wage index will also be changed. A recap of the key amounts is outlined here:

2014 Key Social Security Benefits

2013 Social Security Benefits

What does it mean for you?

  • Up to $117,000 in wages will be subject to Social Security Taxes (up $3,300 or $205 in additional Social Security tax per employee and per employer)
  • The average Social Security retirement beneficiary will receive an additional $228 in 2014.
  • For all retired workers receiving Social Security retirement benefits the average monthly benefit of $1,275/mo. in 2013 will become $1,294/mo. in 2014.
  • SSI (Supplemental Security Income) is the standard payment for people in need. To qualify for this payment you must have little income and few resources ($2,000 if single/$3,000 if married).
  • A full-time student who is blind or disabled can still receive Supplemental Security Income (SSI) benefits as long as earned income does not exceed the student exclusion amounts listed above.

Social Security & Medicare Rates

After temporary payroll tax rate cuts that ended in 2012, the rates do not change from 2013 to 2014.

2013 Withholding Limits

Note: The above tax rates are a combination of 6.20% Social Security and 1.45% for Medicare. There is also a Medicare .9% wages surtax that began in 2013 for those with wages above $200,000 single ($250,000 joint filers) that is not reflected in these figures. Please recall that your employer also pays Social Security and Medicare taxes on your behalf. These figures are reflected in the self-employed tax rates, as self-employed individuals pay both halves of the tax.

Fund Your Retirement or Your Child's College?

With rapidly increasing costs in both health care and in college tuition, deciding which is more important can be a real dilemma. Here are some thoughts.

As our students prepare to head back to school, many families face the difficult decision to save for retirement or use those funds to pay for their children’s college education.

The dilemma

With student loan amounts in the trillions of dollars, our kids are exiting college with debt the size of small home mortgages. Given that both education and health care costs continue rising dramatically from year to year, it is hard for you to prepare financially for both college and retirement. What should you do?

Retirement prior to education

In most cases it is more important for parents to put their financial needs ahead of their children. Why?

  • One of the best ways you can help your child in the long-term is to ensure you won’t be a financial burden on them in the future.
  • Your children can take out education loans, while lending options during retirement years are limited.
  • There are numerous programs available to your child to help them afford college.
  • While it may take years for your child to repay a student loan, they will have future income potential to do so. Your income will be lower or cease upon retirement.

Some tips to consider

There is plenty of opportunity to fund both retirement and college education in a tax advantaged way. You might wish to consider funding basic retirement needs first, then look at tax advantaged educational savings programs.

Retirement: First fund employer provided 401(k) and similar programs, especially if there is an employer match. Max your annual contribution limits if at all possible. After this there may be funds available for your children.

Child’s Education: Look into Coverdell savings plans, 529 college savings plans, and children’s retirement plans. Remember to include others in your plan, like grandparents, as a possible funding source for college savings.

Consider other ways to generate college funds. Here are some ideas;

  • Start saving for both retirement and college early. Use time to help grow the value in your accounts.
  • Attend a public versus a private college
  • Look into work-study alternatives
  • Review and apply for grants and scholarships
  • If you have older children, consider a “pay it forward” strategy, where a younger child’s college fund helps an older child, who then pays the funds back with interest prior to the younger child going to school.

Making financial decisions like this are tough, but with proper planning and insight a path that works for you can often be found.

Are You Maximizing Your Retirement Account Tax Benefit? – 2013 contribution limits

If you have not already done so, consider adjusting your retirment account
contributions to match the expanded annual limits that have increased for 2013.
Here are the new limits.

2013 marks a watershed year for contribution limit increases in many of the core retirement savings programs. Many of these contribution limit increases are established using a federal formula. While most annual limits stayed the same from 2011 to 2012, this is not the case for 2013. Here are current annual contribution limits for the more popular programs:

Retirement Program Current Year 2013 Last Year 2012 Change Age 50 or over to catch up
IRA: Traditional $5,500 $5,000 +$500 add: $1,000
IRA: Roth $5,500 $5,000 +$500 add: $1,000
IRA: Simple $12,000 $11,500 +$500 add: $2,500
401(k), 403(b), 457 plans $17,500 $17,000 +$500 add: $5,500

Take action

If you have not already done so, please consider:

  • reviewing and adjusting your periodic contributions to your retirement savings accounts to take advantage of the higher limits
  • setting up new accounts for a spouse or dependent
  • using this change as a chance to review the status of your retirement plan
  • reviewing contributions to other tax-advantaged plans like Flexible Spending Accounts (health care and dependent care) and pre-paid medical savings plans like HSAs (Health Savings Accounts)

Still Time to Make IRA Contributions for 2012

Remember you have until April 15th to fund last year’s IRA contributions. Here is what
you need to know.

Remember you have until you file your tax return to make a contribution to a Traditional IRA or Roth IRA for the 2012 tax year.  The annual contribution limit is $5,000 or $6,000 (if you are age 50 or over).  Prior to making the contribution, if you (or your spouse) are an active participant in an employer’s qualified retirement plan, you will want to make sure your modified adjusted gross income (MAGI) does not exceed certain income thresholds.  There are also MAGI (income) limits to qualify to make Roth IRA contributions.  The limits are:

2012 IRA contribution limits

Contribution limit: $5,000  or $6,000 (with age 50+ catch up provision)

Income limits:

2012 IRA Contributions

Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phase-out to contribute is $0 – $10,000.

How does the phase-out work?

If the phase-rules apply to you and your income is below the “full contribution” amount noted above, you can contribute up to the maximum annual contribution. But what if your income falls between these ranges?

1. First, subtract your income from the higher (phase-out complete) amount to get your contribution income potential.
2. Next calculate the phase out range.
3. Then, divide your contribution income potential by the phase-out range.
4. Take the result times your maximum annual contribution amount.
Example:  Roth IRA contribution limit for a single person, age 40 with MAGI of $115,000; $10,000 contribution income potential (125,000-115,000);  divided by phase-out range of $15,000 ($125,000 – 110,000);  10,000/15,000= .666  x  $5,000 = $3,300 2012 ROTH IRA contribution limit. Rounding rules apply.

If it’s too late for you to make a 2012 contribution, it’s not too late to plan for 2013. Here are the limits for 2013.

2013 IRA contribution limits

Contribution limit: $5,500 or $6,500 (with age 50+ catch up provision)

Income limits:

2013 IRA Contributions

Note: Married Traditional IRA limits depend on whether either you, your spouse or both of you participate in a qualified employer provided retirement plan. If married filing separate and either spouse participates in an employer’s qualified plan, the income phase-out to contribute is $0 – $10,000.

A final thought: If your income is too high to take advantage of these IRAs you can always make a non-deductible contribution to an IRA.  While the contributions are not tax-deferred, the earnings are not taxed until they are withdrawn.


Tax Surprises for Newly Retired – 5 surprises to know about

Rebalancing your portfolio when you get older makes sense. So does anticipating for these possible tax surprises during your retirement years.

You’ve got it all planned out. Your retirement savings plans are full, you have started receiving Social Security benefits, and your Pension is ready to go. Everything is planned, what could go wrong? Here are five surprises that can turn your plan on a dime.

1. Health emergency and Long-term Care. When a simple procedure could cost thousands, health care costs can put a huge dent in your plan. Long-term care can cost thousands per month. Have you planned for this? If your health insurance is not adequate you may need to pull money out of your retirement plan to pay the bills. While this withdrawal may not be subject to a penalty, it might be subject to income tax if the funds are from a pre-tax account.

Tip: Look into creative ways to enhance your health insurance coverage including supplemental health insurance and prescription drug cost coverage. Consider long-term care insurance and other alternative ways to reduce your potential living needs.

2. Taxability of Social Security benefits. If you have excess earnings, your Social Security benefits could be reduced. Even worse, if you are still working, your benefits could be subject to income tax.

Tip: If this impacts you, consider conducting a tax planning session to better understand your options including the possibility of delaying the receipt of Social Security benefits.

3. Your pension plan. Understand if your pension is in good financial health. Often pensions will offer a lump-sum payout option for you. Should you take it?

Tip: Review your pension plan’s annual statement. How solid is it? If there are risks, consider cash out alternatives and planning for the potential drop in future income.

4. Minimum Required Distribution (RMD). Forgot to take your minimum required distribution from your retirement plans this year? The tax bite could be quite a surprise as the penalty on the amount not withdrawn is 50%!

Tip: Select a memorable date (like your birthday) to review your RMD and take action so this tax surprise does not impact you.

5. Future Tax Rates. The federal government is spending over $1 trillion more than it brings in each year. Cash starved states are looking for new tax revenue. Don’t be surprised when future tax rates continue to rise during your retirement.


  • Create a retirement plan with higher state and federal tax rates
  • Plan for increases in health care costs through Medicare
  • Plan for more tax on Social Security benefits
  • Plan for higher capital gain and dividend taxes (now 20% versus 15%)