There is good news for retirement accounts! The IRS has increased the contribution limits for the upcoming year. As you can see below, an important change for 2022 is that 401(k) elective deferrals increased from $19,500 to $20,500. That’s not all! Please see below for the applicable updates for the coming year:

How do these changes impact your savings in the upcoming year? Are there any changes you should be making? Use this link to schedule a time to meet one-on-one with our team. We look forward to working with you in 2022!

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Transitioning into retirement can be an exciting time. For many it can also be a daunting reality. We hope the following Pre-Retirement Checklist is a helpful tool as you intentionally prepare for your retirement years.

5-10 years out 

• Create a plan to pay down debt.   

• Maintain Emergency Fund – Emergencies still happen in retirement.  

• Familiarize yourself with Social Security, Pension, and/or Defined Benefit options.  

• Consider Long Term Care (LTC) options – LTC Insurance vs Self-insuring using other assets.  

• Maximize all tax-advantaged savings accounts – 2021 Contribution Limits.  

• Review your investment strategy to make sure your retirement accounts are in line with your risk tolerance and timeline.   

• Strategize how to divest from company stock.  

2-4 years out 

• Devise a retirement spending plan:   

  • Identify your retirement spending goals – basic needs, travel, one-time needs, etc.  

  • Take inventory of assets and consolidate as needed.

  • Retrieve Social Security estimates and create a strategy for taking your social security.

  • Determine and clarify your retirement paycheck replacement strategy.  

  • If you are retiring early, figure out how you will bridge spending needs prior to Social Security income, Medicare coverage, and accessing retirement accounts at age 59.5. 

  • Review deferred compensation distribution strategies.  

• Begin developing a plan for a fulfilling retirement (goals, purpose, health).  

• Practice being retired – take a long vacation in the location you plan to retire and live within your retirement budget. 

• Retirement Living Plan:  

  • Evaluate downsizing a home or relocation and the associated tax implications.  

  • If a mortgage is required, relocate while you still have the income to qualify for the mortgage preapproval process. 

• Formulate a plan to exercise your stock options. 

• Review insurance needs – potentially to cancel or lower life/disability insurance.  

< 1 Year out 

• Formulate a health care plan:   

  • Investigate Medicare, Medigap, and Medicare Advantage plans.  

  • Compare Individual Insurance policy or COBRA if you are younger than age 65.  

  • Enroll in Medicare 3 months before age 65.  

• Apply for Social Security benefits 3-4 months before you want benefits to start.  

• Determine how much monthly income you need from your portfolio to cover your expenses.   

• Analyze your retirement income plan.

• Consider a HELOC while you still have the income to qualify.  

• Update estate plan documents with retirement changes.  

• Take advantage of employer medical plans.   

Download this as a printable one-sheeter.

Planning for retirement should be exciting. Please reach out if our team of credentialed experts can help you navigate the road to retirement.

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Social Security is something we contribute to all our working years, so why don’t we know much about it? What sets it apart from other retirement benefits? I want to briefly share some of the characteristics that make Social Security unique and helpful for retirement planning purposes.

Social Security Includes Spousal Benefits

Social Security spousal income is a benefit provided to married couples. If you have a working income that is less than 50% of your spouse’s normal retirement age benefit, a spousal benefit will be added to your Social Security income to make it equal to 50% of your spouse’s income. Even with no working income (homemaker), 50% of the spouse’s normal retirement age income will be received.

To receive this increase in income, the higher-earning spouse must start their benefits before the spousal payments begin. Check your eligibility for spousal benefits here.

Two more things to note:

• There is no benefit to delaying spousal income after normal retirement age as it does not continue to grow.

• If the spouse with the higher income predeceases the spouse with the lower income, the surviving spouse will receive the higher of the two incomes for the rest of their life. For example, let’s say Joe has a social security benefit of $2,800 per month, and his wife, Shirley, has a benefit of $1,400 monthly. At Joe’s death, Shirley will receive $2,800 per month rather than $1,400 per month.

Social Security income is not fully taxable

If you are Married Filing Jointly and have a combined income below $25,000 in 2021, you will not owe taxes on social security benefits. If your income is between $25,000 and $34,000 in 2021, 50% of benefits will be subject to taxation. With income over $44,000 in 2021, a maximum of 85% of benefits will be taxable. Social security income is not subject to Oregon state income tax.

Social Security Income varies based on retirement age

You can start taking social security retirement benefits at the age of 62, but if you are able, it is best to delay taking benefits until normal retirement age (typically age 66). Furthermore, delaying benefits until the age of 70 is even more advantageous, as your income will continue to increase by a certain percentage (based on birth year) until then.

Remember: If benefits are claimed before normal retirement age, half of the benefits will be withheld if income is over $18,960. Benefits will be recalculated at normal retirement age, but it is more beneficial to delay taking social security if someone is planning to work. After reaching normal retirement age, unlimited earned income will not reduce your social security income.

Social Security Income is protected from inflation

Each January the IRS/SSA increases benefits by the amount of inflation experienced over the previous year. These cost-of-living adjustments (COLA’s) are credited even when delaying benefits to a later age. The most recent cost of living adjustment was 1.3% in January 2021. The average estimates over a long period of time are 2.6% annually.

Things to note when applying for benefits:

• Ensure you have Federal withholdings taken from your benefits, often at 12%.

• Remember, your Medicare Part B premiums ($148.50 per check) will be deducted from your benefit if you are over age 65.

• Apply online at www.socialsecurity.gov, by phone at (800) 772-1213, or in person at a Social Security office using the office locator. If you have any questions about social security benefits, please schedule a time to chat.

References:

www.ssa.gov

The Baby Boomer’s Guide to Social Security, Elaine Floyd, CFP®

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Saving for retirement can seem straightforward compared to the daunting task of converting your hard-earned savings into retirement income.

When building a retirement income plan knowing what questions to ask will potentially save you money, lower your overall tax bill, and provide you peace of mind. Here are three questions you should ask when building a retirement income plan, as well as some considerations:

Question 1: What sources are available to you?

There are many ways to fund retirement. Thus, no retirement plan looks the same. To begin to understand how you will fund retirement, give yourself a quick assessment. What sources are available to you and how much?

What you should consider: Simplicity in retirement. This can be achieved by consolidating retirement accounts such as your employer-sponsored retirement plans into an IRA. See - Why an IRA makes more sense in retirement than your 401(k)

Question 2: When do you plan on receiving income from your different sources?

There are a lot of unique planning opportunities regarding when to start receiving your sources of income. Knowing when to access these different sources can provide efficiency, lower taxes paid, and increase your retirement income.

 The IRS and Social Security Administration have imposed rules that coincide with specific ages. Familiarizing yourself with these key rules and ages associated with accessing popular income sources can help you begin to answer the question of “When?”. Here are some key ages to consider when building a retirement income plan around these popular sources -

Tax-deferred accounts (401(k)/403(b)/IRAs):

• Age 59.5 - you can’t access tax-deferred dollars without a 10% early withdrawal penalty before age 59.5. The IRS does highlight some exceptions to the 10% penalty for premature withdrawals.

• Age 72 (or age 70.5 if you were born before 1951) – The IRS requires that an individual withdraws a minimum amount of their retirement plans (i.e. an IRA) each year starting in the year they reach age 72. This requirement is known as a required minimum distribution or an RMD. Account-holders that do not take their full RMD will be faced with a stiff excise tax equal to 50% of the RMD not withdrawn.

Social Security:

Most Americans can begin claiming Social Security retirement benefits as early as age 62, or as late as age 70. Once you stop working, it can be tempting to claim Social Security as soon as possible to subsidize your income. However, it’s often strategic to delay Social Security as long as possible. The longer you delay claiming your Social Security benefit the greater your guaranteed inflation-adjusted monthly benefit will grow (up to age 70). Factors that should be considered when creating a plan around Social Security are life expectancy, other sources of retirement income, and spousal benefits.

What you should consider:

• Which sources you will draw first?

• Should you delay social security as long as possible?

• How long each source will last?

Question 3: What are the tax implications of accessing your retirement income sources?

Not all income sources are taxed at the same rate. Take the time to understand your applicable taxes and build a tax-sensitive retirement income plan to prevent paying unnecessary amounts to the government.

What you should consider:

• The tax implications of the aforementioned RMD’s. RMD’s can unknowingly force you to pay a higher than necessary tax bill once you are forced to take required withdrawals.

• A tax bracket optimization strategy that provides savings on your overall retirement tax bill. This can be especially beneficial in the early years of retirement. Learn more about Tax Bracket Optimization here.

The misfortune of not having a retirement income strategy.

Heading into retirement without an income strategy is financially precarious. To illustrate the benefit of creating an effective plan, we are sharing a hypothetical example.  Meet Charlie and Frankie:

• Charlie (age 61) and Frankie (age 60) live in Oregon and each plan to retire when they turn age 62.

• Charlie has $1,000,000 in a 401k/traditional IRA.

• Frankie has $250,000 in a 401k/traditional IRA.

• They have $150,000 in joint accounts.

• At age 67 Charlie and Frankie are eligible to receive $2,990/month and $2,376/month, respectively.

• Their annual income goal during retirement is $90,000.

In the following charts, we compare the impact of an efficient retirement income strategy to one that is not. The only thing that is different in the two scenarios is the consideration of when to draw specific sources and the associated tax implications. Unfortunately, when managed inefficiently the couple is only able to maintain their target annual income for 26 years. Additionally, the inefficient strategy forces the couple to pay an additional $129,000 tax over 30 years when compared to a more efficient strategy.

Assumptions: 4% investment rate of return on all accounts. No additional contributions are made to investment accounts. Taxes include both Federal and Oregon State income tax.

This is one of the most important financial decisions you can make.

Taking the time to thoroughly answer these questions can provide long-term value.

Engaging with a financial planning firm can be helpful if you are not fully confident in making a retirement income plan. Working with the right financial planning firm for your unique situation can be the difference between a carefree retirement and a stressful one. To learn more about how we think about serving clients through comprehensive financial planning, check out our services here.

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Oregonians are not saving enough for retirement. OregonSaves is a state-sponsored retirement plan for employers that that do not offer an employer-sponsored retirement plan for their employees.

This program is ideal for employers who wish to encourage employees to save for retirement, but do not currently sponsor a retirement plan. Since there are no employer fees involved in OregonSaves, the biggest commitment is designating time to initiate and complete the enrollment process. Overall, OregonSaves aims to lower the barrier of entry for employees and at the same time provide employers the opportunity to help champion their employee’s financial well-being.

The plan highlights

OregonSaves is designed to combine features of employer plans with Roth Individual Retirement Accounts (IRA’s).

What It is

• Employee contribution and participation is voluntary.

• Self-employed individuals are also eligible for participation.

• The standard contribution rate is 5% of employees’ gross pay. These dollars are contributed directly from payroll into to a Roth IRA. Note that the 5% savings rate may be adjusted up or down and savers can also elect to make contributions through a bank account or a check.

• Employees first $1,000 will automatically be invested in the OregonSaves Capital Preservation Fund.

• Savings over $1,000 will automatically be invested in an OregonSaves Target Retirement Fund.

• There are three investment choices available through OregonSaves: Capital Preservation Fund, Target Retirement Funds, and a Growth Fund.

What It Isn’t

• Employee annual contributions are limited to $6,000 (or $7,000 for those 50 years and older). This program is not meant to replace or compete with employer-sponsored 401(k) plans.

• No employer contributions are permitted.

The Administration Considerations

One effective way to combat a saving deficit is to automate savings through payroll. Employers are responsible for syncing payroll with OregonSaves. Once the setup is complete, the ongoing maintenance includes updating employee lists and submitting employee saving elections.

Enroll Your Employees Today

If you think your employees would benefit from participation, then visit the OregonSaves website or consult our team with questions you may have.

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We frequently receive questions about which tax forms are required for a tax return. Generally speaking, most 401(k) retirement savers do not have to report anything special for taxes. Unfortunately, making generalizations about taxes is a slippery slope. We know taxes are confusing, so we have outlined some common 401(k) scenarios and their tax implications:

1. You made contributions to your 401(k) account this past year. You took no withdrawals or loans.

This scenario is true for most people. If your interaction with your 401(k) account was just saving money, then you will not receive any special tax forms for your 401(k) account. Your contributions (which are synced with payroll) will appear on your Form W-2 in box 12. Code D is for your pre-tax contributions and Code AA is for your Roth contributions. Ta-da!

2. You quit your job or were terminated during the year.

If your employment status changed, there are several ways this could impact your tax return. Here are the most common situations for employees: 

You did not move or make any transactions in your 401(k) account once you were terminated.

• If this is the case, then your tax filing responsibility is like scenario 1) above. The information that is important for your tax filing is included in Box 12 of your Form W-2. For those readers with an old 401(k) account (like an account you haven’t touched in 5 years), you should not expect to receive a Form W-2 from your ex-employer or report anything for your current tax return.

You (or your employer) cashed out your 401(k) account.

• If this is the case, then you will receive a 1099-R form. Additionally, your employer would indicate your gross distribution in box 2a and withhold 20% of your cashed out balance for federal taxes.

3. You took a withdrawal from your 401(k) account.

As discussed above, if you took money out of your 401(k) account then you will receive a Form 1099-R. Typically, a 401(k) withdrawal triggers income tax and a 10% penalty for individuals younger than 59.5 years old. However, the 2020 CARES Act eliminated the 10% taxation of distributions related to adverse financial consequences caused by the coronavirus. 

4. You completed a 401(k) direct rollover.

If you rolled an old 401(k) account to your new 401(k) account, you should receive Form 1099-R. Because this is not a taxable event, the form will indicate that your gross distribution is not subject to taxes. This will appear in box 7 with a code G (pre-tax) or H (Roth) for a rollover.

If you rolled an old 401(k) account to an IRA, then you will receive a Form 5498 for proof that your dollars were moved. Again, your income tax for such transaction is $0 assuming the rollover was complete within 60 days.

5. You have been paying down a 401(k) loan.

If you contributed to a 401(k) account without any late-payments or defaulting, then you do not have anything special to report for your tax return. This is similar to scenario 1) above.

6. You defaulted on a 401(k) loan.

In this case, you will receive a Form 1099-R and pay income tax on the outstanding balance. Additionally, you will pay a 10% penalty (if applicable).

7. You retired.

If you retired this past year, congratulations! There is nothing for you to report on your income tax return unless you took money out of your 401(k) account, in which case your taxable distributions would be included on Form 1099-R and included in your taxable income.

8. You turned 72 in the previous year.

If you turned 72, you need to research the Required Minimum Distribution (RMD) rules.  For example, if you are 72 years old and still working then you don’t have to take a RMD (unless you are a >5% owner of the organization). These rules are important to understand because the financial penalties for missing a RMD are substantial. Lastly, the 2020 CARES Act waived RMD requirements for this past year.

Taxes are complex! Please reach out to our team if you have any questions about your 401(k) account and your taxes.

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Are you retiring from PERS soon? Provided below is a concise breakdown of the most common benefit options and what they mean.

Often it makes the most sense to receive a lesser monthly benefit while protecting your loved ones with a survivorship option. Comparatively, it is like paying insurance monthly to ensure there is income for your beneficiary if you should die prematurely.

There are many more factors to consider, but a written estimate and analysis in coordination with your financial plan will provide a platform for deciding the best option for you and your family.

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We recently read the article, "401(k) Plans No Longer Make Much Sense for Savers", published by Bloomberg Opinion. We do not recommend reading it. The fallacy starts with the title.

The author mentions that the “government offered a huge tax savings to encourage retirement savings, while today it offers little or no benefit”. The article compares generalizations about the tax environment in the 1980’s to our lower tax rates today. The author argues that because tax rates are lower today, there are fewer tax benefits for savers in 401(k) plans. That is a half-truth.  

Let's rebut the title and highlight some of the reasons 401()k plans, given today’s tax rates, are indeed beneficial for investors.  

Roth Savings  

We have yet to meet someone who enjoys paying taxes, but we acknowledge that tax rates are lower today than they have been historically. See for yourself.

Rumor has it that Roth accounts are built for young people and those who expect their career earnings to increase in the future. However, it is often strategic for highly compensated people to have some Roth savings as part of their portfolio as well.

However, not all highly compensated individuals are eligible to open a Roth IRA account, but anyone inside a 401(k) plan with a Roth savings option may make contributions. The article failed to mention that because today’s tax rates are lower, there is a compelling reason to make Roth contributions to a 401(k). We believe that Roth savings make more sense than ever. 

Choices 

Regardless of the tax rate environment, 401(k) accounts allow participants to choose when they pay taxes on their contributions. As we know, We the People love choices. 401(k) accounts are different from many other savings accounts because taxes on interest and dividends are paid every year.  

Contribution Limits 

Contribution limits for a 401(k) account are higher than they are for an IRA account. Saving more today means having more later. Plain and simple.  

Dollar-Cost Averaging 

Aside from the financial advantage of Dollar-Cost Averaging, 401(k) accounts alleviate some of the behavioral burden investors face when trying to time the market. Instead of vacillating about when to let go of your hard-earned dollars, 401(k) accounts buy shares in the stock market every single pay-period.  

Credit Protection 

401(k) accounts are safe from lawsuits. These accounts are designed such that only a spouse and the IRS can claim on your savings. While this may seem insignificant, it is beneficial to have some of your assets protected in case of an unpredictable life event.  

STAY INFORMED 

Be skeptical. Get your news from a trusted source. At Human Investing, we are fiduciaries. We share the truth, the whole truth, and nothing but the truth. We operate with a higher standard of service. We are also a B-Corp, which is not a coincidence but rather a certificate that substantiates our values.   

Be informed. This is especially important for your 401(k) fees and the taxes you pay.  

Be proactive. Take advantage of your employee benefits. 401(k) plans make sense for a lot of savers. 

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Target-date funds – also known as lifecycle funds -- adjust their allocation (stocks, bonds, cash equivalents) as time passes. The embedded strategy allows individual investors to select their target retirement year, and then sit back, relax, and enjoy the ride. While the nature of a target date fund is designed as such, it is still important for investors to periodically review their strategy with a financial advisor.

To help illustrate the different stages, Rachelle Locey has illustrated different life stages for a fictious person, Sophia.  For purposes of this example, assume the year is 2020, Sophia is 20 years-old, and she expects to retire at age 65.

**Note: this is an example and not a guarantee of what the Fidelity Fund 2065 (FFSFX) will look like in the future**

Meet Sophia

Age 20: Sophia has a part-time job and some extra dollars to invest. She opens a Roth IRA account and invests in the Fidelity Freedom Fund 2065 (FFSFX). With nearly 45 years before retirement, she can benefit from the potential growth of equities and other long-term assets. In 2020, her asset allocation looks like this:

*all percentages are rounded*

Age 25-45: Sophia switches employers three times and works full-time at each job. Her same target-date fund (FFSFX) maintains a consistent asset-allocation during the first twenty years of her career. Even though she is getting older, Sophia is still categorized as a young investor.

Age 50: It is not until Sophia is age 50 that her Fidelity Freedom Fund will experience a noticeable shift in asset allocation. She is now considered a middle-aged investor since her expected retirement age of 65 is only 15 years away. The fund starts to move some dollars out of stocks into more conservative investments.

Age 55: Sophia is still considered a middle-aged investor. Since these dollars are geared towards retirement, the fund will continue to shift away from equities and towards less risky assets.

Age 60: Sophia’s retirement is only 5 years away! Once again, her asset allocation will shift away from equities and towards less risky assets that are designed to protect her hard-earned dollars.

Age 65: It is time to retire! Sophia has worked full-time for nearly 45 years. Since she no longer expects to earn income from an employer, she will begin to make withdrawals from her retirement account to support her daily life. As such, her asset allocation is expected to look something like this: 

Age 70+: Even though Sophia has reached her target year of retirement, her target-date fund will continue to exist. Human Investing wrote about what happens to target date funds after they reach the target year here.

Takeaways

There will be many life changes and developments between now and retirement. However, one thing will remain consistent: target-date funds continue to evolve over time. These funds remove the guessing game and can help an investment build a portfolio based on their time horizon.

Because the changes happen behind-the-scenes, investing in a target-date fund is one of the simplest ways to grow a retirement savings during earning years and protect savings during retirement years.

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We are now crossing a zone of turbulence. The Captain has turned on the fasten seat belt sign. Please remain seated. Thank you.

Human Investing serves as a fiduciary on a variety of employer-sponsored retirement plans. We get the opportunity to meet with individuals with different vocations, interests, and life goals.  This is because we advise retirement plans ranging across different industries, different ownership structures, and different geographic locations. We have also established on-site client visits at different points in the year.

Over the years, we have provided advice throughout different market highs and lows.

That’s a lot of differences.

Despite these differences, we have a similar conversation with each retirement plan participant. We remind participants that it’s the decades and not the days that are important for building one’s retirement savings. Given the current market volatility, it’s not surprising that we have been receiving more phone calls than usual. And these calls are welcomed! It is our job to ensure that participants feel equipped and empowered to survive this turbulence.

Both financially and emotionally, one of the best ways to thrive in market volatility is to ensure that you have created a sound strategy for your 401k account.

What do we think is a sound strategy?

When we meet with 401k participants, we discuss their expected retirement age and then check these three boxes:

1. Savings Rate

2. Tax Advantages

3. Investment Strategy

Your retirement horizon is a key driver for the synchronization of tax advantages, a contribution amount, and an investment strategy geared for your retirement age. If we have spoken before, then we would have checked these boxes. Note that market volatility in and of itself does not uncheck boxes, but it often prompts us to review our account setup. 

If you are not expecting to access your dollars soon, then my gentle reminder to you is as follows: by doing nothing, you are doing something. If you sustain your contribution rate and remain invested in the stock market, your account will grow over time. To illustrate this concept, see the chart our team created to show the importance of being invested today.

Total values (assuming a 7% annual rate of return and an inflation rate of 3.22%). Actual results will vary.

Lastly, and most importantly, we recognize that today is stressful. We feel it, too. Quite frankly, there is something for everyone to worry about. Please take precautions and be mindful that your mental and physical health is of utmost importance during this time.

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@emilegt

We have all been told to save for retirement.  We need the “Magic Number” before we can retire.  What about having debt during retirement?  Most retirement planning calculators ignore debt and debt payments can limit the amount of future income and can wreak havoc on retirement.  A comprehensive financial plan considers debt in the retirement equation providing a tool and process to fully answer the retirement questions.

Studies Show Debt is Increasing for those Entering Retirement

More of us than ever before have debt going into retirement.  A study by Lusardi, Mitchell and Oggero entitled “Debt Close to Retirement and Its Implications for Retirement Well-being,” quotes numerous findings demonstrating that those nearing retirement have increased borrowing at all economic levels.  Based on a 2015 NFCS survey of persons from age 56 to 61, 37% had mortgages, 11% had home equity loans, 14.6% still had student loan debt, 29.6% carried auto loan debt and, 36.4% had credit card debt with a balance paying interest.  And more concerning, 23% had what they called, “expensive credit card behavior” meaning, “paying the minimum only, paying late or over-the-limit fees, or using credit cards for cash advances.”  

Debt is a Presumption of the Future

When we take out debt, we presume that we will have future income that will both cover living expenses and the additional payments we promise to make.  We effectively reduce our future income.  For the retiree with adequate income and assets, debt might be okay.  The retiree that has cash in an account to purchase a car that takes a no interest loan might come out ahead.  And at any time, they have the power to pay off that debt.  However, often debt is a decision that can cripple future living.

Debt in Retirement Limits Lifestyle

Of course, a debt payment means higher total expenses, but it doesn’t stop there.  Debt usually means more expense due to the added interest.  Additional debt and interest require higher retirement distributions.  Higher distributions from IRA accounts increase taxable income and can increase the likelihood Social Security income will also be taxed.  And for many, the result of the compounding expenses due to debt eventually lead to the need for a cut to lifestyle and live on less. To the 23% with “expensive” debt behavior in the study, even more expenses come due to late payments and higher interest costs which further the cycle of limits on lifestyle.

Financial Planning Answers the Questions

While some debt might be considered “okay”, most we know is not.  How do we know?  The answer comes in a financial plan.  It pulls together all the other pieces of the story and provides a structure to answer the question.  A financial plan provides possible options, strategies and answers.  It is a tool and process that fully answers the retirement equation.  Do I have enough for retirement, including debt?

Want to create your financial plan today?

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Many of the blogs that we post reference strategies on how to save for retirement and how many Americans need to save more than they currently are (or else you might end up like this.)

However, in addition to saving, many of us will be a recipient of a retirement account via a loved one or acquaintance passing away. Will Kellar and I had the idea to consolidate some good resources online and provide a road map for beneficiaries as they look to navigate best practices when they are on the receiving end for one of these accounts. In a season of loss, remember we are here to help navigate this difficult time.

You are listed as a beneficiary, are you the SPOUSE or OTHER?

You are a spouse listed as a beneficiary

 

Traditional, SEP IRA, or SIMPLE IRA

Option 1: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

• Designate your own beneficiaries.

Next steps

• This option is only available if you are the sole beneficiary.

• All that’s needed is to roll the funds into your existing IRA or open a new IRA to roll the funds into.

When is the money available?

• You can access funds at any time, but a penalty will apply to distributions made before 59 ½.

• After 70 ½ your account will be subject to normal required minimum distributions.

This might make sense when

• If you are over age 59 ½ this option often can make sense because it provides flexibility on beneficiaries you can designate, you have the full ability to access funds. Additionally, if you are between 59 ½ and 70 ½ you might be taking yourself out of a Required Minimum Distribution (RMD) scenario.

Option 2: Transfer the assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• You will not have to pay a 10% early withdrawal penalty.

• You can designate your own beneficiaries.

Next steps

• You can transfer assets into Inherited IRA in your name.

• If there are multiple beneficiaries you must establish a separate account by December 31st following the year of death in order to use your own life expectancy. If you miss this deadline RMD’s will based off of oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Your life expectancy may be used to calculate RMD’s.

If the original account holder was under 70

• RMD must begin by the later of:

  • December 31 following the year of the original account.

  • December 31 of the year in which the original account holder would have reached 70 ½.

• If the original account holder was 70 ½ or older:

  • RMD’s must start by December 31st of the year after death.

  • If the original account holder did not take RMD for the year in which he or she died, you must take at least that amount as a distribution by the end of the current year.

This might make sense when

• If you are under 59 ½. By transferring to an Inherited IRA you provide yourself flexibility in three ways:

1. You have the option to withdrawal funds penalty free based on your life expectancy. So if you would like the money over time this is a great choice.

2. You also have the choice to start RMD’s based on when your deceased spouse would have turned 70 ½.

3. If you are hoping to use all of the funds in the next 5 years there is a provision called the “5-year method” that allows for distribution of all funds without paying penalties over the first 5 years of the account being open.

Option 3: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty (think of this as following the 5-year rule).

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds.

Qualified Retirement Plan (401(k), 403(b), etc.)

Option 1: Leave it in Plan (this is dependent upon plan rules)

Benefits

• Dollars can continue to grow tax-deferred.

• You will not have to pay a 10% early withdrawal penalty.

• You can designate your own beneficiaries.

Next steps

• You can transfer assets into Inherited IRA in your name.

• If there are multiple beneficiaries you must establish a separate account by December 31st following the year of death in order to use your own life expectancy. If you miss this deadline RMD’s will based off of oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Your life expectancy may be used to calculate RMD’s.

If the original account holder was under 70

• RMD must begin by the later of:

  • December 31 following the year of the original account.

  • December 31 of the year in which the original account holder would have reached 70 ½.

• If the original account holder was 70 ½ or older:

  • RMD’s must start by December 31st of the year after death.

  • If the original account holder did not take RMD for the year in which he or she died, you must take at least that amount as a distribution by the end of the current year..

This might make sense when

• You are needing to by some time and do not have trusted place to open an IRA this is a great option. Ultimately, in our opinion having these dollars end up either in an IRA in your name or an inherited IRA often providing additional flexibility.

Option 2: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

• Designate your own beneficiaries.

Next steps

• This option is only available if you are the sole beneficiary.

• All that’s needed is to roll the funds into your existing IRA or open a new IRA to roll the funds into.

When is the money available?

• You can access funds at any time, but a penalty will apply to distributions made before 59 ½.

• After 70 ½ your account will be subject to normal required minimum distributions.

This might make sense when

• If you are over age 59 ½ this option often can make sense because it provides flexibility on beneficiaries you can designate, you have the full ability to access funds. Additionally, if you are between 59 ½ and 70 ½ you might be taking yourself out of a Required Minimum Distribution (RMD) scenario.

Option 3: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty (think of this as following the 5-year rule).

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds.

ROTH IRA

Option 1: Transfer the assets to your own IRA

Benefits

• Dollars can continue to grow tax-deferred.

Next steps

• If you are the sole beneficiary you can transfer funds into your existing or new ROTH IRA.

• If you are one of multiple beneficiaries, you must take your share as a distribution and roll into a ROTH IRA within 60 days.

When is the money available?

• You can access funds at any time.

• Distributions are generally tax and penalty free if you are over 59 ½ or qualify for a penalty free exception and have met the five-year holding period. Schwab provides guidance if you are looking for what rules apply to you if you are looking to distribute funds.

This might make sense when

• You plan to take distributions based on when you turn 59 ½ not the beneficiary.

Option 2: Transfer the assets to an Inherited ROTH IRA

Benefits

• You bypass the 10% early withdrawal penalty.

Next steps

• Transfer assets into Inherited ROTH IRA held in your name.

• If there are multiple beneficiaries, separate accounts must be established by December 31st following the year of death in order to use your own life expectancy; otherwise RMDs will be based on the life expectancy of the oldest beneficiary.

When is the money available?

• You can access funds at any time.

• Any earnings are generally tax free if the five-year holding period has been met.

• Your life expectancy may be used to calculate RMDs.

Annual distribution (RMDs) must begin by the later of:

• December 31 following the year the original account owner died or

• December 31 of the year when the original account holder would have reached 70 ½

You may also follow the five-year rule under which the account must be fully distributed by December 31 of the fifth year following the year of death.

Option 3: Take a lump sum distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• All at once.

• Distributions are generally tax and penalty free if you are over 59 ½ or qualify for a penalty free exception and have met the five-year holding period.

This might make sense when

• You have an immediate need for the funds.

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You are listed as a beneficiary, not a spouse

 

Traditional, SEP IRA, or SIMPLE IRA

Cannot roll over to your own IRA

Option 1: Transfer assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited IRA, under your name.

• If there are multiple beneficiaries you must establish a separate account by 12/31 to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point. Dollars withdrawn will be considered taxable income. Here are some distribution options:

  • Cash out the IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

• RMDs must start by 12/31 of the year after death.

• If account holder was younger than 70 ½ and original account owner did not take an RMD for year of death, you must take this RMD amount for current year.

• Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy while allowing dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Taxable portion of the distribution will be considered taxable income.

This might make sense when

• You have an immediate need for the funds. Note that by taking funds out all at once there is the potential to move into a higher tax bracket.

ROTH IRA

Cannot roll over to your own IRA

Option 1: Transfer assets to an Inherited Roth IRA

Benefits

• Dollars can continue to grow tax free.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited Roth IRA, under your name.

• If there are multiple beneficiaries you must establish a separate account by 12/31 in order to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point, any earnings are generally tax-free if the five-year holding period has been met. Here are some distribution options:

  • Distribute the Roth IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

• RMDs must start by 12/31 of the year after death.

• Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy allowing for dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Any earnings are generally tax-free if the five-year holding period has been met.

This might make sense when

• You have an immediate need for the funds.

Qualified Retirement Plan (401(k), 403(b), etc.)

Option 1: Transfer assets to an Inherited IRA

Benefits

• Dollars can continue to grow tax-deferred.

• No 10% early withdrawal penalty for distributions.

• Designate your own beneficiaries.

Next steps

• Transfer dollars to Inherited IRA, under your name. This must be done so as trustee-to-trustee transfer, where the distribution check is made payable directly to the new inherited IRA account; if the beneficiary takes possession of money, it is permanently and irrevocably distributed and ineligible for rollover.

• If there are multiple beneficiaries you must establish a separate account by 12/31 in order to use your own life expectancy for Required Minimum Distributions (RMDs). Otherwise RMDs will be based off the life expectancy of the oldest beneficiary.

When is the money available?

• Able to access dollars at any point dollars withdrawn will be considered taxable income. Here are some distribution options:

  • Distribute the Roth IRA in 5 years, by Dec 31st of the fifth year since the retirement account owner’s death.

  • Take distributions over your life expectancy.

  • Take distributions over life expectancy of original owner.

  • Take Out Required Minimum Distributions Over the Oldest Beneficiary's Life Expectancy.

  • RMDs must start by 12/31 of the year after death.

  • Notably, the requirement for a non-spouse beneficiary to take out a minimum distribution is only a minimum requirement the beneficiary may take out more, anytime he wishes.

This might make sense when

• The non-spouse beneficiary wants more flexible distribution options than in the Qualified Retirement account.

• The non-spouse beneficiary would like to stretch inherited dollars, taking distributions over their life expectancy allowing for dollars to continue to grow tax deferred.

• The non-spouse beneficiary is older than the original owner (who was not 70 ½ at death), it’s more appealing to use the decedent’s longer life expectancy.

Option 2: Lump Sum Distribution

Benefits

• No 10% early withdrawal penalty.

Next steps

• Transfer assets to bank account or brokerage account.

When is the money available?

• Dollars available at once.

• Taxable portion of the distribution will be considered taxable income.

• The distribution will be subject to a mandatory 20% Federal Tax withholding (possible additional state tax will be withheld).

This might make sense when

• You have an immediate need for the funds.

 

In a season of loss, remember Human Investing is here to help navigate this difficult time.

Sources: www.irs.gov www.schwab.com

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