Ways to pay for long-term care
21Sep

How to Cover Long-Term Care Expenses

BlogSeptember 21, 2022

Does planning for long-term care seem sensible for your retirement?

The answer: Many will not plan for an LTC until it is too late.

Where do you start?

Paying for Long-Term Care in Retirement

Each option has advantages and risks and knowing these will let you determine what your best plan of action is.

From Retirement Assets:

Without any coverage you will pay for LTC out-of-pocket. For most retirees, this is not the best option. If you are married, there is a good chance you and your spouse will both need long-term care. Essentially doubling your cost in LTC, you may consider shared care if you are married to save on costs.

Traditional Long-Term Care Insurance

This option is all-or-nothing. You either use the benefits or you do no end up using it. However, if you do not use the LTC insurance policy, your family/heirs do not typically see a death benefit payout. As a specialized insurance, you pay to have the insurance company cover out-of-pocket costs for long-term care. With the need for long-term care increasing, over the years policy holders have seen increases in premiums.

Life Insurance Policy with Chronic Care Rider

Life insurance can provide an upgrade. As part of your policy, many life insurance companies offer a rider that will help pay for long-term care. In the case you should need long-term care, your life insurance will pay out a fourth of the death benefit from your policy up to four years. Should you not use all the death benefit for your long-term care, your heirs will receive whatever remains after you pass.

These riders can also apply to permanent life insurance policies that will allow a portion of the policy to be invested; a portion that will grow and may be tax-free upon withdrawal.

Deferred-Income Annuities

While used more as a stream of income, deferred-income annuities may be used as monthly payments to offset the cost of long-term care. In some cases, you may be able to purchase a deferred-income annuity with long-term care coverage or a long-term care rider.

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all about rmds in retirement
07Sep

How Should I Take My RMDs in Retirement?

BlogSeptember 7, 2022

Using tax-advantaged retirement accounts to save during your working years is a smart move. By using these accounts, you are deferring taxes. However, this postponement does eventually come with an expiration date. The government will come looking for its share. This bill comes in the form of calculated required minimum distributions (RMDs) beginning when you are age 72.

What are RMDs?

Required minimum distributions are withdrawals from your traditional retirement accounts such as 401(k) or an IRA. The amount is dependent on your savings and life expectancy. RMDs are calculated and serve to collect taxes on money that has grown tax-free. CPAs oftentimes do not want to take multiple RMDs because it increases taxability. However, whether liked or not, after 72, RMDs are mandatory.

How are RMDs calculated?

RMDs are calculated based on life expectancy and the total you have in your retirement accounts. Using one of three IRS tables, your life expectancy is given a factor number which is then divided into the funds subject to RMDs to determine what you need to withdraw.

What is the best way to take RMDs?

While the best way is always to consider your individual circumstances, there are two common ways to take RMDs. First, you may want to wait until the last possible minute which would be Dec. 31 of that year to maximize your returns. Secondly, you may want the regularity of a paycheck, so you could opt into 12 monthly payouts of the RMD.

Why You Should Never Skip & How to Ease Withdrawals

Skipping an annual RMD will result in heavy penalties versus what the income tax may have been. You would be fined a 50% excise tax of the RMD you should have taken. For instance, if you did not take your RMD of $10,000 you would have to pay a levy of $5000 to the IRS—an amount far greater than the income tax you would have needed to pay. Unfortunately, no catchups would be permitted in future years and no credit is given for taking more in past years.

The bill comes due to all tax-advantaged retirement accounts. Unfortunately, there is no way to avoid this, but there are a few ways to lighten the toll. Some strategies are following:

Charitable Donation

After calculating your RMD you can donate up to $100,000 to an authorized charity of your choice via a qualified charitable distribution (QCD). A QCD does not add to your taxable income, therefore you are lessened your tax bill and are providing funds for good causes. Note the QCD must be directly made to the charity. If you accepted it as an RMD and then donated, you may still be responsible for the taxes.

The Still-Working Exemption

CPAs not retiring at 72 are exempt, but the exception only applies to the current employer’s retirement plan. So, while it does not defer all RMDs, it helps! If you are approaching 72, consolidating your retirement accounts into your current employer’s plan may be a great idea.

QLAC Delays

You could use funds from a traditional retirement account such as your IRA or 401(k) to purchase a qualified longevity annuity contract (QLAC). Doing so may reduce your RMDs. As a deferred annuity, QLAC payouts can be put off until age 85, thus putting the tax bill the retirement funds used due later as well for approximately a decade.

Roth Conversion

As the only tax-advantaged retirement accounts, Roth IRAs do not have RMDs. You have a window between when you retire until when the first RMD comes due make use of Roth conversions. CPAs see their income drop after retirement making that window for Roth conversions more than perfect to convert traditional accounts into a Roth IRA while in the lower income tax bracket.

However, this often-underutilized retirement strategy comes with some risk.

  1. Moving pre-tax money means paying taxes when moved into the Roth IRA.
  2. You may increase the portion of your SS benefits that are taxed or may trigger the Medicare surcharge tax.

Ultimately, you can have your money grow tax-free, RMD-free until you or your family need the funds.

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underestimated retirement risk: medical costs
01Sep

Do Not Forget Healthcare Costs When Retirement Planning

BlogSeptember 1, 2022

How are you to account for health care costs while retirement planning? Oftentimes, these expenses are underestimated. Even though Medicare Part A is free and covers hospitalization, the remainder of Medicare comes with premiums and the rest of health care and drug costs are out-of-pocket even with supplemental insurance.

Why are health care costs underestimated?

CPAs transitioning into retirement often do not consider that what they were paying in premiums is not the full amount. Thinking they need the same “take-home pay” folks forget that their employer was paying a good chunk of the premium costs when budgeting and the rest was coming directly out of their paychecks. Now, facing retirement, CPAs are responsible for out-of-pocket costs and the full premium.

Familiarization with Health Care Premiums

Having Medicare Part A helps immensely when it comes to health care costs, especially since it is free. However, you will be responsible for other premiums to help cover medical expenses.

  1. Medicare Part B: In 2022, premiums increased to $170.10 monthly. Note in the future this will increase.
  2. Medicare Supplemental Insurance: For coverage not offered through Part A or Part B of Medicare, supplemental insurance is available. This will help with medical expenses, but does not cover dental, hearing, or vision.
  3. Medicare Part C: Known as Medicare Advantage, these policies vary in coverage and price, but offer options including Part A, Part B, hearing, dental, and even vision. Furthermore, Part D (prescription drug coverage) is also included.
  4. Medicare Part D: As coverage for self-administrated prescription drugs, Part D requires a co-pay per prescription. Unfortunately, some drugs are not covered.
  5. Long-term care insurance premiums: Medicare only covers so much of long-term care costs after a certain amount of time, and even then, it will add up quickly daily. To make sure you are covered, building a LTC policy to your wants and needs is best. This is an important factor to consider for retirement planning because 70% of retirees experience a long-term care event.

How much could coverage and any out-of-pocket costs be then?

Knowing Total Health Care Costs

Adjusted for inflation, in 2021 multiple studies found that retirees were spending about $6200 on premiums and approximately $6500 on out-of-pocket costs for health care. For 2022, the projected amount for out-of-pocket costs is $7000. And with rising health care costs and inflation, the average expenses are predicted to increase by a minimum of $3500 by 2030.

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Inflation Reduction Act of 2022 and retirement planning
15Aug

The Inflation Reduction Act of 2022 and Its Impact on Your Retirement

BlogAugust 15, 2022

As a watered-down version of the Build Back Better Act of 2021, the Inflation Reduction Act of 2022 is set to be signed by President this week. The bill is designed to reduce the deficit and lower inflation while investing in domestic energy production and lower prescription drug costs. On top of the deficit reduction projected to be more than $290 billion, this bill allows Medicare to negotiate lower drug costs and extends the Affordable Care Act program through 2025. The goal: lower consumer costs and help the nation reduce emissions long-term.

Once signed into law, how will my retirement be impacted?

Your retirement will be impact someway somehow.

The deficit reduction is intended to fight inflation by cutting the taxes Americans are paying. With the capability to reduce inflation, your retirement income will have more spending power, and we will eventually hopefully enter a period of deflation. However, there is a slim chance we will see a dent in inflation this year with this bill.

Since Medicare will be able to negotiate drug prices with pharmaceutical companies the savings will impact retirees directly. In addition, a $2000 out-of-pocket cap for Medicare enrollees buying prescriptions comes along with preventative vaccines being free.

Moreover, since the ACA program is being extended, the Covid-19 subsidies helping make insurance more affordable for some Americans. Good news: this is most applicable to those who had to retire early and aren’t eligible for Medicare just yet.

With the focus of the Inflation Reduction Act being partially on cleaner energy investments, business and consumers can participate in clean energy investment incentives, too. Businesses themselves can receive a tax credit for clean energy manufacturing, and another tax credit for wind and solar energy production. Consumers get to enjoy the tax credit incentives for greener options for investing in renewable energy and further tax credits for buying electric cars, new and used.

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19Jul

Having An HSA While on Medicare

BlogJuly 19, 2022

Health savings accounts can be tricky, especially when you are on Medicare. Not only do you need to meet certain criteria to have one, but you need to meet the same requirements to keep contributing to it.

One requirement to have an HSA is a high deductible plan, and you cannot have another health care plan. Since Medicare is considered another health care plan, and one that does not have a high deductible, you are not able to contribute to your HSA once you enroll with Medicare.

However, that does not mean you are unable to use your HSA along with your Medicare plan. You have stockpiled that money to help cover medical costs, and you are still able to use the HSA funds to cover expenses Medicare might not. Or to even help with Medicare premiums, copays, or deductibles.

How does an HSA while enrolled in Medicare?

To maintain and contribute to an HSA you need to be on a health plan that is a high-deductible plan. And you cannot be on any other medical insurance plan. This even means Medicare. Once you are enrolled in Medicare, you are not qualified to use your pretax dollars to contribute to your HSA.

You may be able to keep contributing if you are not enrolled in Medicare at 65. This takes special circumstances, being you are not yet retired or receiving SS benefits.

Is there a penalty for having Medicare and an HSA?

Fortunately, you will not face a late penalty if you have health care from your employer. This means, you have delay Medicare enrollment until you do retire. Retirement qualifies you for the Special Enrollment Period. The same rules apply if you are on your spouse’s employer’s health care plan.

However, if you turn 65 and do not have other coverage, you will be charged a penalty. Once you do enroll in Medicare, your Part B premium will be increased by 10% monthly for each year you did not enroll. Since you are also enrolling late without any special circumstance, you will have to wait until the Open Enrollment Period to sign up.

How can I use my HSA to help with Medicare premiums?

Since an HSA is for medical and healthcare costs, you can use the funds for qualifying expenses such as:

  • Part B, C, or D premiums
  • Medicare deductibles
  • Copays or coinsurance
  • Dental or vision
  • Over-the-counter medicines
  • Out-of-pocket costs

Can I pay Medigap premiums with my HSA?

You can, but you will have to pay taxes on the money you withdraw to do so. A Medigap plan is not a qualified medical expense, which is why you will have to pay taxes on the money taken out of your HSA to pay for it.

Are there tax penalties when using an HSA with Medicare?

You will pay tax penalties if your HSA contributions and Medicare enrollment overlap. The penalty amount will vary depending on your situation, circumstances, and how long they overlapped.

  • You will be subject to back taxes on any contributions to your HSA made after your Medicare enrollment starts. Plus, your contributions will be added back to your annual taxable income.
  • You may be hit with an excess tax by the IRS if you have contributed after your Medicare enrollment date. Excess taxes will be an additional 6% (if not more) when you take it out of your health savings account.

The IRS strongly recommends those contributing to an HSA stop doing so six months before they enroll in Medicare. Once you are enrolled in Medicare, the IRS considers the 6 months before your enrollment as a period you had access to Medicare. Stopping before that 6-month period means you should avoid any penalties that could be assessed and saves money, too.

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RMDs to QCDs to save on taxes in retirement
05Jul

Qualified Charitable Distributions May Reduce Retirement Taxes

BlogJuly 5, 2022

Required minimum distributions may increase your tax bracket in retirement, but there is a way to help manage your tax exposure and help great causes: qualified charitable distributions (QCDs). At 72, you are required to take distributions from traditional IRAs to ensure you are not stockpiling the money, and that Uncle Sam gets his cut. QCDs are your ticket to reducing your retirement income taxes.

What exactly is a Qualified Charitable Distribution?

A qualified charitable distribution satisfies your required minimum distribution from your IRA directly to a qualified charity. Fortunately, the money gifted with a QCD does not count towards you adjusted gross income as it would with a regular RMD.

How can a QCD save you tax money?

They reduce your adjusted gross income but fulfilling the RMD requirement without needing to be reported as income.

How does a QCD work?

You instruct the custodian of your account to directly pay the RMD as a QCD to a qualified 501(c)(3) charity.

Are there any rules or qualifications for QCDs?

There are rules, but they are straightforward:

  • You must be 70 ½
  • To have the QCD count the funds must come from your IRA by your RMD deadline. And for most that is the last day of the year.
  • Whether one big contribution or smaller ones, QCDs have an annual max of $100,000 per individual. Meaning, married folks can donate up to $200,000.
  • QCDs cannot exceed more than what you owe in taxes or qualify for a refund.
  • IRA contributions may reduce the amount for QCD you can deduct.

Who can make QCDs?

Anyone with a traditional IRA who is over 70 ½ can make qualified charitable distributions. Note: QCDs only apply to IRAs and not 401(k)s, 403(b)s, SIMPLE, or SEP IRAs.

What charities can receive a QCD?

For tax purposes, the IRS has a defined list of organizations that can receive QCDs. Their list is here.

How do taxes work with QCDs?

Normal required minimum distributions must be reported and are taxed. No federal or state withholding tax is made on distributions to qualified charities.

Using IRS For 1099-R you report your QCD as a normal distribution. However, please note, this only works on IRAs that are not inherited. Distributions donated from inherited IRAs need reported as death distributions.

Though your QCD is not taxed, you cannot claim it as a charitable tax deduction (the IRS does not approve of double dipping). When you make the QCD make sure you get donation acknowledgement for your records.

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28Jun

After Taxes Now, Tax-Free Later: Roth 401(k)

BlogJune 28, 2022

Tax-advantaged has quite the ring to it, doesn’t it? Unlike the tax-advantages a traditional 401(k) offers—funded with pretax wages—a Roth 401(k) is funded with after tax wages. Income tax has already been paid so when it comes to withdrawing in retirement, your money is withdrawn tax-free.

What exactly is a Roth 401(k)? Created in 2006, Roth 401(k)s are employer-sponsored retirement savings accounts that use after-tax money.

How They Work

While employer-sponsored, enrollment and participation in Roth 401(k)s is entirely voluntary. Payroll deducts the special funds after taxes have been taken out each paycheck. Some employers may offer matches for Roth 401(k)s.

In comparison, a traditional 401(k) and a Roth 401(k) have different tax-advantages. A traditional 401(k) reduces an employee’s gross annual income, providing a tax break now. However, regular income taxes will be due upon withdrawal during retirement. A Roth 401(k) requires income tax be paid but reduces an individual’s annual net income. But after the money is placed into the Roth account, no further taxes are owed when taken during retirement—this includes profits earned.

Much like the traditional 401(k), a Roth 4010(k) is subject to contribution limits and is based off the investor’s age per guidelines of the IRS. For 2022, an individual may contribute up to $20,5000. Those over 50 are permitted a catch-up contribution of $6500. Another perk Roth 401(k)s offer is no income limit.

Withdrawal Special Considerations

Certain criteria must be met for withdrawals to be tax-free.

  • The Roth 401(k) must be at least 5 years old.
  • Withdrawals must occur when the account holder is at least 59 ½. If before, account holder must has passed or experiencing qualifying disability.

Roth 401(k)s do require required minimum distributions. Once you are 72 the first RMD from your Roth 401(k) must be taken by the first April after you turn 72. If you are still working for the company who sponsors the retirement account, you may hold off taking a distribution.

Advantages and Disadvantages Summary

Pros:

  • Helps those who may be in a higher tax bracket during retirement (which is commonly seen)
  • Distributions are tax-free.
  • Earnings grow tax-free.

Cons:

  • Uses after-tax dollars, meaning during working years you are out that money
  • Contributions do not limit taxable income

Roth 401(k)s and Market Volatility

Sadly, you can lose money since a 401(k) is an investment into the market. However, most employers offer low-risk options like government bonds. You are always welcome to work with the plan sponsor and stir up your investment yield and risk.

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Roth IRA basics
20Jun

Retirement Savings: Consider a Roth IRA

BlogJune 20, 2022

A Roth individual retirement account is a brilliant way to save for retirement. Much like a traditional IRA, a Roth IRA allows you to invest and for it to grow tax-free. One great advantage this type of account has is that it also lets you take tax-free withdrawals of your contributions at any age. Your earnings may have the same benefit under certain circumstances. For your earning to be withdrawn tax-free you must be:

  • 59 ½ years old
  • Disabled
  • Using the funds as first-time

Naturally, like any tax-advantaged retirement account, the IRS has stipulations and rules that cover contribution limits, income limits, and withdrawals.

Roth IRA Eligibility

The first requirement for contributing to a Roth IRA is having earned income. This could be from the income earned from working for someone else (commissions, tips, bonuses count). Secondly, this earned income could be from a self-operated business or other means of earned income such as tax alimony or even combat pay.

Earned income that does not count:

  • Rental properties
  • Nontaxable alimony
  • Child support
  • SS benefits
  • Unemployment benefits

On a plus side, there is no age limit for making Roth IRA contributions. From a teen working a summer job to someone even in their 80s can contribute. Note: someone under 18 would need to set up a custodial account.

If you are contributing towards another qualified retirement plan you are still eligible to contribute towards a Roth IRA. So, if you earn money and meet the limitations, you can contribute towards your own Roth IRA and your employer-sponsored 401(k) plan.

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Retirees are easy targets for scams
01Jun

Why Retirees are Targeted Most by Scammers

BlogJune 1, 2022

Annually, an estimated 3.5 million retirees fall victim to financial exploitation. Scammers take advantage of elders due their vulnerability. Those who are 80+ are the most at-risk group for scammers. Ruthless and always on top of trends and the latest news, scammers will try to pull a fast one via the phone, targeted emails, or even through websites.

Why are seniors targeted more than any other age group?

Money, Money, Money

With decades of saving and planning, elders are more particularly targeted due to being the wealthier, more established society members. Also, more likely to have own their homes outright, elder Americans have approximately 1.7 times the wealth than the working middle class due to their savings.

Loneliness Leads to Vulnerability

Retirees are usually empty nesters, and oftentimes loneliness leads to isolation as family grows and friends get older, too. This makes the perfect breeding ground for con artists to build a relationship with elders especially telephone scammers. Elders are always happy to get a call and are more than willing to listen to their narratives. Once the scammer can gain the retirees trust they have an easier time exploiting.

Cognitive Issues

Unfortunately, with aging comes cognitive decline. Even though seniors are reporting scams more often than younger folks, they have a harder time remembering the little details necessary. What makes matters worse is that seniors do not realize that they were scammed until sometimes weeks after the fact. Memory loss presents first with haziness, and short-term memory is the first to experience issues.

Other Health Issues Make Easy Targets

Easy for health scams, seniors are more likely to have other health issues such as cancer, autoimmune diseases, and limited mobility. The health scams will target retirees with fake remedies for these issues since they are seen as personal.

Retirement Staples

As the baselines to retirement, Medicare and Social Security are very important to seniors to maintain their health and finances. If a call or email comes through for these programs talking about issues elders are very prone to panic. The panic-inducing targeting gets retirees to act out of fear for losing their benefits or insurance. Retirees are more likely to share their information to scammers when something that important is threatened.

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