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Know Your Retirement Plan Options

Earlier this week, the IRS made some adjustments to the required minimum distribution (RMD) rules for 2020.  First, some background.  With the passage of the SECURE ACT, an RMD for 2020 is no longer required.  But what if you had already taken your RMD?  Can you put it back?  Well, that depended on when you took it.  For those people who took their RMD out during the March through June window, they were allowed to reverse the transaction and put it back into their account without penalty.  In April, the IRS announced it would allow distributions that were taken in the month of February to be returned.  However, if you happened to have taken your RMD anytime in January, you were out of luck and could not put that money back into your retirement account. 

Just this week, things changed when the IRS announced that anyone who had taken withdrawals, regardless of when they were taken, would be allowed to put the money back into their retirement account as long as it was done prior to August 31st.  Effectively, this was an extension of the normal 60-day rule.

Depositing the funds back into your retirement account has several possible benefits and considerations:

  • Lower income usually means lower taxes.  You should certainly check with your CPA regarding your particular situation as to whether it is beneficial for you to return some or all of this year’s distributions, but in doing so you likely will save on this year’s taxes.
  • The lower income for 2020 could impact your Medicare rates, again this should be discussed with your CPA.
  • Consider converting the RMD into a Roth IRA. In this scenario, you would not put the distribution you received back into the same account, but rather into a Roth IRA where the amount can be invested, tax-free.
  • For some that may have taken the RMD and simply deposited into a non-qualified investment account, moving the money back is a relatively simple process. 
  • For others, particularly if you are using the funds as a source of regular retirement income, coming up with the money to deposit the funds back into the retirement account can be a bigger challenge.
  • However, if the RMD is not needed for monthly retirement support or a specific purpose, it may even make sense to borrow the money for a few months in order to avoid the extra taxes.  This should be determined on an individual basis as to what makes sense for you, but an example could be:
    • A client could draw on a home equity line or take a short-term margin loan in order to generate the cash needed to deposit the funds back into their retirement account.
    • Since they will not be needing the 2021 RMD for living expenses, they will simply use that money to pay off the loan in early 2021.

In short, every investor, whether it is a traditional IRA or perhaps an inherited IRA should review their situation and determine whether reversing the RMD is beneficial to them or not.  If you and your CPA decide it is beneficial then we welcome the opportunity to assist you with finding a source of funds to make the deferment a reality.  Whether you are an existing client or simply need some independent guidance in regards to these questions we hope you feel comfortable contacting us for a complimentary review of your specific situation.

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Tackle Your Student Loan Debt

If you are one of the 44 million borrowers saddled with student loan debt, it can be a heavy burden to carry. According to Forbes, student loan debt is the highest it has ever been at more than $1.5 trillion. That ranks second, behind only mortgage debt, as the highest consumer debt category. The Institute for College Access and Success pegs the average amount owed for borrowers in the 2017 class at $28,650. 
There are many contributory factors to the student debt crisis, but three in particular stand out. The first is the cost of education. Using inflation adjusted data for Americans 25 – 34 years old, as reported by the Philadelphia Inquirer, the cost of a four-year public education is 2.5x more expensive than it was in 1977. The second factor is the median level of debt has increased 3.3x. And lastly, the median income has stayed exactly the same at $34,000. Simply stated, we have a situation where costs are going up, debt levels are going up but income is staying the same. This is otherwise known as a recipe for disaster.
Beyond the dollars and cents, carrying high levels of debt can affect your mental and emotional well-being by causing stress, anxiety, insomnia and even feelings of isolation. Financial anxiety is no stranger to most Americans. However, letting it overcome you will not make it go away, it will only make it worse. There are strategies to tackle your debt and begin on the road to financial freedom.
First Things First
The first step is to know what debt you have, as in how much is owed, are they federal or private loans, and what interest rate (cost) you are paying? This information is important and a needed first step in making a plan to tackle the debt load.
Spending and Cash Flow
Now that you have a clear picture of your debt, it is important to prioritize your monthly spending. It’s unwise to sacrifice all other planning and opportunities due to the overhang of the student debt. For example, you need to work on building an emergency fund to cover the unexpected turns in life. Everybody’s circumstances are different but a good rule of thumb is to start by shooting for two to three months of expenses.
An opportunity that you should take advantage of because it will pay off in the long run is your 401k and IRA’s. Not saving for your retirement simply because you have debt is a bad idea. There are tax benefits, possible matching money contributed by your employer and not to mention, the greatest benefit of all which is the opportunity for compounding interest on your investments over time.
Making the Payments
Depending on your monthly cash flow, the quickest and most efficient way to tackle your debt is to pay more than what is owed. If you are able to get into the habit of putting even a little extra per month on top of the minimum this will save you money over the life of the loan. If this is not an option based on your circumstances then look for opportunities throughout the year to add to your payment by using extra funds that you may earn from a bonus, raise or side gigs. The takeaway here is that anytime you can accelerate your payments beyond the minimum, you will save money in interest charges that otherwise would be applied to the loan.
Restructuring: Consolidation vs Refinancing
Consolidation typically refers to federal student loans that get combined and repackaged as one loan with an extended term. Since the term of repayment has been extended, the monthly payment most likely will go down. The interest rate will be fixed but it becomes a weighted average of your previous loans that were combined. Bottom line, if you pursue this option, do know it is free and can be done online through the Department of Education. Take a skeptics approach and perform due diligence on any service offering to handle your consolidation for a fee.
Refinancing, while technically a form of consolidation, largely centers around private lenders combining your private student loans into one. If you have both federal and private loans, they can be refinanced together as well. The lender will look at your entire financial picture to determine the refinancing offer so the terms and interest rates will vary. Depending on such things as your credit score, job and salary, it may or may not make sense to refinance so be sure to evaluate each lender and offer on its terms to understand total costs.
Get Started Now
Whether it’s student loan debt, credit card debt or even just concerns over retirement planning or preparedness take the time to sit down with a financial advisor and establish a plan designed to meet your specific needs. Our firm provides this type of guidance in a complimentary fashion and as an independent fee-only RIA we always act as a fiduciary and do what is in our client’s best interest. There are many free resources available and addressing your financial future now will be beneficial on so many levels. Let us know if we can help.
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Be Generous With Your IRA Withdrawals

We are not tax advisors, but over the past few months a clear trend has developed during our conversations with clients and income tax professionals – The new higher standard deductions have made charitable contributions less beneficial and often non-deductible.

In actuality, it’s a combination of things, the higher standard deduction, limits placed on the amount of state and property taxes that are deductible as an itemized deduction, and so forth.  Although everyone’s specific financial and tax situation is different, there is a common theme that appears beneficial to most.

Historically, clients would take their annual required minimum distribution (RMD) from their IRAs, SEP’s, SIMPLEs or 401-k plans.  This RMD is the amount the IRS requires you to withdraw each year from your retirement plan(s) once you reach age 70 ½.  The amount of the distribution is generally included as ordinary income and is taxable in most situations.  In the past, most clients would report the income and then they would itemize their taxes to include charitable contributions and as long as their total itemized deductions exceeded the standard deduction, they received a financial benefit from making the charitable contributions.

In 2018, however, the new tax law essentially doubled the standard deduction level.  Meaning if you no longer have expenses that qualify as itemized deductions on your return, then essentially you receive no financial benefit from making the charitable contributions.  To illustrate:  Assume John & Mary are 71 years old and normally itemize for tax purposes.  In 2017 between state and property taxes, charitable deductions, mortgage interest and any other qualifying expenses they had $20,000 in itemized deductions.  In this case they benefitted from their charitable contributions.  In 2018, the $20,000 would be below the standard deduction so they would benefit more taking the standard deduction and by not itemizing.  In other words, the money they gave to charities in 2018 provided them with no benefit tax-wise.  They would have received the same level of deductions had they not given any money to charities. 

Most of us like to give.  We want to help out worthy causes and the deductions for income tax purposes always made it that much more appealing.  So, what is a person to do?

As I stated in the beginning, there is a solution that is increasingly beneficial.  Sending your IRA distributions directly to a charity allows you to reduce your taxable income by the amount donated to the charity and doesn’t impact your taxable deductions because you still qualify for the higher standard deduction level. 

For example, if your RMD is $50,000 for 2019.  If you take it as a normal distribution you will report $50,000 as income; however, if your RMD is $50,000 and you give $20,000 of the $50,000 directly to charities then you will only report $30,000 as income.  If you don’t itemize you still get the same standard deduction level you would if your income was the $50,000.  Even if you still itemize, taking the reduction from your income is usually much more beneficial than taking it as an itemized expense.

Consult your tax advisor to see if this strategy can benefit you as much as it has benefitted several other clients of ours.  If you are not yet taking distributions from your IRA, but know others that are (parents, family or friends) encourage them to also get tax advice in regard to this scenario.

If you have any questions or would like to talk about your specific situation, please contact our office.

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Happy New Year

Quinton, Terri and I hope everyone had a prosperous 2014 and is enjoying the Holidays with their family and friends. We appreciate the support all of you have shown to us in 2014 as we finish our 11th year at Ables, Iannone, Moore & Associates. Here’s hoping that 2015 is the best year ever for you and your family.
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