(7/16/2014) Tonight’s Radio Show: The View of Pittsburgh from the Mayor’s Office

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The View of Pittsburgh from the Mayor’s Office

Join us tonight at 7:05 pm on KQV 1410 AM. Program also streams live at www.kqv.com. Encore presentations air EVERY SUNDAY at 9:05 am.

Tune in KQV 1410 AM tonight at 7:05 p.m. as The Lange Money Hour welcomes a very special guest, Pittsburgh Mayor Bill Peduto.

After serving three terms on City Council representing the East End, he was elected Pittsburgh’s 60th mayor last November capturing 84 percent of the vote. Inaugurated on January 6th, he has just completed his first six months in office.

A self-described progressive Democrat, Mayor Peduto has been a consistent voice for fiscal discipline in Pittsburgh. As a councilman, he was the only city politician to call for Act 47 state protection; a controversial step in addressing decades of financial mismanagement that left Pittsburgh with the highest debt ratio and the lowest pension funding in the nation. Despite some improvement in the fiscal situation, he feels the city needs to remain under financial oversight to take care of its long-term problems such as pensions, debt, and need for capital improvements. After only six months in office, Mayor Peduto has already taken active positions on a broad range of issues from same-sex marriage, achieving sustainable revenue by establishing relationships with major non-profits, and technology and efficiency, to dedicated bike lanes and supporting ride-sharing services like Lyft and Uber.

These are just a few of the subjects on tonight’s agenda, and listeners, since our show will be live, you can join the conversation by calling KQV at 412-333-9385 after 7:05 p.m. You can also email questions in advance of the show by clicking here.

If you can’t tune in tonight, KQV will rebroadcast the show this Sunday, July 20th at 9:05 a.m. The audio will also be archived on our web site at www.paytaxeslater.com/radioshow.php, along with a written transcript.

Finally, please join us on Wednesday, August 6th at 7:05 p.m., when we’ll welcome another financial industry giant, Dr. Roger Ibbotson, to the next edition of The Lange Money Hour.

www.paytaxeslater.com 800 387-1129 or 412 521-2732 admin@paytaxeslater.com

Backdoor Roth IRAs: A Potential Way for High Income Earners to Participate

Posted on by in 401(k), 403(b), Educational Resources, IRAs, Roth 401(k), Roth IRA, Roth IRA Conversions, Traditional IRA and tagged , , , , .

The traditional contribution (“front door”) for Roth IRAs is currently not available for higher income earners. Married couples earning $191,000 or more and singles earning $129,000 or more in 2014 are still barred from contributing directly to Roth IRAs.

In 2010, Congress changed the rules and since then anyone can convert a traditional IRA to a Roth IRA. However, higher income earners are still ineligible to contribute to a Roth IRA.

A Backdoor Roth IRA is a strategy for some higher income earners to participate in Roth IRAs.  It is a way for higher income earners to put money into a traditional IRA and then roll that into a Roth IRA, getting all the benefits.  While this strategy sounds simple, there are several rules that you must know and follow to make sure you do not incur unintended tax consequences.  This is where working with a knowledgeable financial or tax professional can provide some great guidance and value.

One of the primary benefits of a Roth IRA is that any money contributed grows tax-free and is withdrawn without any further income taxation. In addition, unlike a traditional IRA, Roth IRAs have no required lifetime minimum distributions. Another benefit of a Roth IRA is it can be passed on to your heirs income tax free. This allows your funds to grow and compound tax free over many years.

Want to learn more? Give us a call at 412-521-2732.

More on this subject in the coming weeks.

– James Lange

Social Security Analyzed – Part 2 of 2

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Running the Numbers for a Single Social Security Recipient

To accurately compare the financial benefits of waiting until age 70 to take benefits vs. starting to at age 62, we are going to assume that you will not spend any of your benefits from the time you start collecting until the time you reach age 70. In fact, we are going to assume that you will reinvest all the benefits you’ve received, until age 70. If we don’t make that assumption, it is extremely difficult to make an “apples to apples” comparison.

For our example, we have two single people with identical earnings records. One starts collecting at age 62 and invests all the benefits at 4%. The other one waits until age 70 to begin collecting.

The gold line on the chart on page 3 represents the accumulation over time for the 62-year-old, and the green line represents the accumulation over time for the one who waited until age 70 to begin taking benefits.

If you take benefits at 62, you receive 75% of what you would have received if you waited until age 66, and if you wait until age 70 you will receive 132% of what you would have received had you taken benefits at age 66. By waiting until age 70 you will see a 76% increase in your monthly benefit from what you would have received at age 62.

The math here may not be immediately obvious so, consider an example. If your PIA at 66 is $100, and you decide to begin benefits at age 62 you will get $75. If you wait until 70, you will get $132. The additional amount you would get for waiting is $57 ($132-$75 = $57). The percentage by which you will have increased your benefit is 76% ($57/$75).

The person who waits until age 70 to take Social Security and lives past age 81 will ultimately receive a lot more in benefits than the person who takes the benefit at age 62 (age 81 is roughly the break-even point). That assumes a 4% (after tax) rate of return. If you assume a lower rate of return, the break-even age would be even younger. Now, you might think that age 81 is a long time to wait to break-even, but let’s think about the issues of long-term financial goals and concerns in more detail.

If you don’t absolutely need your Social Security benefits to maintain a reasonable lifestyle, and you anticipate living past age 81 (or even if you only think you only have a reasonable chance of surviving until age 81), here is why you should consider waiting. You may think the conservative thing to do is to take it early because if you don’t survive to age 81 you will “win.” That is the way I used to think about it until I was enlightened.

Larry Kotlikoff, an economist at Boston University, and a guest on The Lange Money Hour, taught me a better way to think about it. “Don’t think like an actuary,” declares Larry, “think like an economist.” You have to think about what you should be afraid of and what you should not be afraid of for financial purposes. For financial purposes, you should not fear an early death. You will be dead, and therefore you will have no more financial problems. What you should be afraid of, though, is living a long time and not having enough income to meet your needs. The big problem you could face is not having enough money to comfortably sustain you over your extended lifetime.

What you are doing when you hold off on taking Social Security is ensuring a greater income into your old age. In our example, if you live to age 95, the difference, in terms of the total amount collected, would be $3,345,019 vs. $2,587,914. That’s more than $750,000 additional dollars in your own pocket. The key concept to understand is this: the longer you live, the bigger the difference in the amount you collect and the greater your financial security if you live a long time.

Let’s face it, if you begin taking benefits at age 62 and you don’t absolutely need them, and you die shortly thereafter…well y ou are dead. No more worries. “But wait,” you say, “what about my spouse who is still alive. I want to take care of him/her too.” Exactly. Remember, in the previous example we are only talking about an individual who is not married. As will be seen, marriage introduces a completely new set of concerns that make waiting longer to collect benefits even more lucrative.

To receive the rest of the chapter, please e-mail us at admin@paytaxeslater.com or call Alice at (412) 521-2732.

 

Social Security Analyzed – Part 1 of 2

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We have been “running the numbers” for Social Security benefit optimization to help clients choose the best strategy. We also analyzed Social Security more deeply that we ever have before in order to write our new book, Retire Secure! for Same-Sex Couples. This post is an adaption of a portion of the chapter on Social Security in the book that is applicable to everyone. If, after reading this excerpt you would like the rest of the chapter, please e-mail or call our office and we would be happy to send you the rest of the chapter. Of course we also offer custom analysis.

There are several sophisticated strategies that can be successfully used to maximize your benefits if you are married. But we find that many clients and readers need to understand some of the basic concepts and strategies before we move to the more sophisticated strategies which are usually possible if you are married.

For now, however, we will forget about the marriage issue. A point of contention regarding Social Security is when to begin receiving benefits: as soon as you are eligible, several years later, or even waiting until you are age 70. Let’s just talk about whether it makes sense, in general, to take Social Security early. For discussion’s sake, let’s assume your attitude is, “Well, gee, I’m retired, I’m 62 years old, I’ve been paying into this system for my whole life, and now it’s time for me to get some money out.” Should you start collecting Social Security benefits at 62?

Comparison of Taking Social Security at Age 62 or Age 70

First, it is important to understand that the dollar amount of your retirement benefit depends upon the age at which you begin to collect it. Let’s assume you were born between 1943 and 1954. Your Full Retirement Age (FRA) is 66. This is set by law. The amount you will get if you begin to collect benefits at age 66 is called your Primary Insurance Amount (PIA). If you begin to collect benefits at a different age, the amount you will receive is a function of your PIA. If you begin early, you obviously start receiving an income earlier, but allowing for interest, etc. (details to follow) you will receive less per month than if you had waited. If you start taking benefits at 62, the earliest age at which you can begin to collect benefits, you will suffer the maximum reduction in benefits. If you begin to collect benefits after full retirement age, you will receive larger benefits. You can get the largest benefit by waiting until age 70. So, the two extremes would be signing up for benefits at age 62, or waiting and taking at age 70. The earlier you collect, the lower your  benefit will be for the rest of your life.


The table on the left shows the percentage of your PIA (the amount you would get at age 66) that you will receive based on the age when you apply. For every year that you wait to collect benefits after Full Retirement Age (FRA) you will earn an extra 8% per year. Please note this table doesn’t include Cost of Living Adjustments (COLA), which in all instances make the advantages of waiting even greater.

Our next post will touch on running the numbers for a single Social Security recipient as well as Social Security breakdown analysis with benefits reinvested at 4%.

Attention Retirement Savers: Retirement Accounts Are Different! Part 2

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In my last blog post, “Attention Retirement Savers: Retirement Accounts Are Different! Part 1”, I briefly spoke about the fact that retirement accounts are different.  In this post I’m going to dive into those differences further.
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Some of the differences are they:

  • Do not pass through the will (unless payable to an estate)
  • Are not subject to probate (unless payable to an estate)
  • Receive no capital gains treatment
  • Receive no step up in cost basis up death
  • Cannot be gifted (in most cases)
  • The title cannot be transferred to a trust
  • Are subject to special rules, called Required Minimum Distributions

IRA accounts are perhaps the only assets in your estate that will require you to take out a minimum distribution. Also, please remember that by placing a title of an IRA into a trust, you may cause immediate taxation. Once again, IRA or retirement assets are different!

Through proper planning, you can set up your IRA so that your heirs, whether they are your children, grandchildren or anyone else, can receive what is called an Inherited IRA. There are various tax laws, regulations, rules and even private letter rulings that may effect the decisions you make in setting up these Inherited IRAs. Investors should note that stretch or inherited IRAs are designed for individuals who will not need the money in the account for their own retirement needs.

In planning your retirement account, it is imperative that you review the importance of choosing the right beneficiary/beneficiaries. An informed decision can help you better understand your options, when considering tools like Roth IRAs, which were created by the Taxpayer Relief Act of 1997 and further modified by the IRS Restructuring Reform Act of 1998. Remember, Roth IRAs are significantly different than traditional IRAs and need proper planning as well.

Keeping current with new tax laws is another essential ingredient for successful retirement planning. In fact, The Pension Protection Act of 2006 (PPA) made some significant changes for retirement accounts.

The bottom line is retirement account distribution and planning, while it may look simple on the surface, is something that should be taken seriously and work through with knowledge of the rules, regulations and tax code. Sometimes even people in the financial arena or savvy investors are not familiar with these complicated tax laws.

Whatever you do, make sure you or who you are working with is familiar with the tax laws regarding retirement distribution rules.

Still a little unsure about some of the topics discussed?  Let us help you.  Please give our office a call today, we’d be glad to assist you and address your needs! 412-521-2732

– Jim Lange

Attention Retirement Savers: Retirement Accounts Are Different! Part 1

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According to the Investment Company Institute, it is estimated that there is over $20 trillion in retirement accounts as of December 30, 2013. Retirement accounts make up the majority of many people’s assets and unfortunately, many owners of IRAs and their financial advisors are not fully aware of the complicated tax laws regarding distributions of these retirement accounts.

Many people focus on the investments within these accounts and their returns, which are very important, but they overlook the important strategies that can save investors and their heirs’ money in the long run.

Retirement accounts are different!

People often forget that retirement accounts have to be in the name of an individual and that the beneficiary designation will override any other estate planning document such as your trust, will, etc. Therefore, it is imperative that you separate the retirement accounts from any other part of your estate when establishing a proper plan for distribution of these assets.

The rules regarding these retirement accounts or IRAs can be very complex and cause many mistakes.

Many times, financial professionals refer to IRAs as “Individual Riddle Accounts” because they are significantly different from most other assets in your estate plan.

On my next blog post I’ll explain some of the differences.

– Jim Lange

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 5-8

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Disclaimer: Please note that the Tax Cuts and Jobs Act of 2017 removed the ability for taxpayers to do any “recharacterizations” of Roth IRA conversions after 12/31/2017. The material below was created and published prior the passage of the Tax Cuts and Jobs Act of 2017. 

5. The impact of the conversion on your current income tax rate.
By converting to a Roth IRA you are immediately recognizing, in the year of your conversion, income that could propel you into a higher marginal tax bracket. The only way to really sort this challenge out is to crunch the numbers and try to make the best decision based upon your current tax bracket versus your future income tax bracket expectation.

6. Potential estate planning opportunities.
Roth IRAs can, in certain situations, offer estate planning opportunities. For investors that have other sources of retirement income and do not need to use their traditional IRA monies during their lifetime, a conversion can help leave income tax-free Roth IRA monies to heirs for gift and estate planning purposes. Because you pay the income tax on a Roth IRA up front, your heirs inherit this Roth IRA free of income taxes. When considering a Roth IRA for estate planning purposes, please keep in mind that the conversion will immediately reduce your IRA assets if you cannot pay the conversion tax with non-IRA assets and therefore you may have less money available to grow in your retirement plan. Roth IRAs offer tax-free earnings which can be more attractive than the tax-deferred earnings of a traditional IRA. However, if you have less money in your retirement account, this may not bring the results you desire.

7. Tax laws are always subject to change.
Remember, tax laws are always subject to change. Therefore, it is advisable for anyone making this decision and/or other decisions to stay in contact with a financial professional who is current and informed of these rules. When making financial decisions that involve tax laws it is always advisable to think about the “what ifs” and make sure you make the most informed decision.

8. Roth IRA Conversions Made in 2014 Can Be Recharacterized
Under current federal tax laws, all taxpayers have the option of recharacterizing or “undoing” a Roth IRA transaction. When you choose to recharacterize a Roth IRA, you are essentially making an election to place your retirement funds back to the way they were before the conversion.

This process can be completed no later than October 15th of the year following your conversion.  Please remember that under current tax laws, there are restrictions on how you must handle a partial recharacterization of a Roth IRA. You cannot choose to recharacterize only those investments that have declined in value. This is not allowed under the Anti-Cherry Picking Rules.[1] The Anti-Cherry Picking Rules were specifically designed to prevent people who converted to a Roth IRA from recharacterizing only those investments that declined in value. The effect of this rule is to pro-rate all gains and losses to the entire Roth IRA regardless of the actual stock or investment recharacterized. One strategy that is allowed is for an investor to break up their IRA into two separate IRAs and then convert to two separate Roth IRAs. You should familiarize yourself with the IRS laws regarding recharacterization in order to implement this strategy. As a financial advisor who understands these rules, we have experience in guiding clients in this area.

Summary

In conclusion, we realize the decision to convert some or all of your retirement account to a Roth IRA is complex. While this article is for informational purposes only and should not be deemed tax advice or an individualized recommendation, we hope that some of these points are helpful to you.

Should you have any question on whether or not you should contribute or convert to a Roth IRA, we welcome the opportunity to help you map out a strategy that will be best for your situation. Saving for retirement has and always will be a priority for most investors. We enjoy helping clients and prospects explore all of their options.

 

 

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 2 – 4 of 8

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2. Married couples who file separately are now allowed to make Roth IRA conversions.
Under the prior rules, married couples who filed separately were not allowed to convert to Roth IRAs (unless they have lived apart for more than one year). The rule changes in 2010 allow married couples who filed separately to convert to a Roth IRA.

3. You can make a partial Roth IRA conversion.
Making a Roth IRA conversion does not have to be an all or nothing decision. Although the rules surrounding partial conversions can be complex, a competent financial professional can help you understand the tax impacts and rules that govern converting some, all or none of your existing IRA to a Roth IRA. Like any other decision, all of the variables of your particular situation should be considered so you can make an informed decision. You should consider running the numbers for your situation to best determine the impact of making a full or partial conversion to a Roth IRA.

4. What is your age and time horizon?
Should you elect to convert to a Roth IRA, there is a 10% federal penalty on any withdrawal made within the first five years from that Roth IRA. Also, like with other retirement accounts there is a 10% federal tax penalty on any withdrawal made prior to the age 59 ½ (unless an exception applies). This needs to be factored in when making your decision as to whether or not you should convert all or some of your IRA funds to a Roth IRA.

An advantage of the Roth IRA is that investors over the age of 70 ½ are not subject to Required Minimum Distributions (RMDs) and therefore those investors who do not need to use the money to live off can continue to grow these funds tax-exempt. A qualified financial professional can help you map out, based on your age and time horizon, a strategy that is most likely to avoid or minimize the impact of penalties involved with Roth IRA conversions.

New Roth IRA Conversion Rules – Eight Things Investors Should Know by James Lange, CPA/Attorney – Fact 1 of 8

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Although Roth IRAs have been available since 1997, starting in the year 2010 many financial firms and companies started marketing campaigns discussing Roth IRA conversions.

Prior to the year 2010 there were income limits to both contributing and converting to Roth IRAs. However, the Tax Increase Prevention and Reconciliation Act (TIPRA) of 2005 made some modifications to those rules starting in 2010 that still apply today. For over a decade, Roth IRAs were available only for individuals under certain income limitations. Income restrictions still exist in terms of contributions to a Roth IRA; however, in 2010, changes have removed these restrictions for Roth IRA conversions. These changes have opened a window for investors who were previously excluded from converting to a Roth IRA to consider this conversion.

Many financial firms are capitalizing on these new rule changes with heavy marketing, but like every important financial decisions, this decision needs to be made with extreme care and is best determined case-by-case. For an investor that already has a traditional IRA or retirement plan it is best to discuss with a financial professional whether converting to a Roth IRA is the right move before making any decisions.

Here is Fact 1 of 8 that can help you weigh your decision.

Fact 1. The income limitations for Roth IRA conversions has been removed under previous IRS laws.
Prior to 2010, households with modified adjusted gross incomes exceeding $100,000 were not eligible for Roth IRA conversions. While restrictions still exist for contributing to a Roth IRA, there is no longer an income limit for who can convert an existing traditional IRA or employer plan to a Roth IRA. The IRS’s removal of these income limitations has created a marketing opportunity for financial companies to promote and encourage investors to explore this option. As we mentioned earlier, this is a major financial decision and it is typically in your best interest to discuss your situation with someone who understands all of the moving parts involved.

 

[1] As identified in IRS Notice 2000-39

Important Tax Birthdays

Posted on by in Important Tax Dates, Income Tax, IRAs, Medicare, Social Security and tagged , , , .

The “Happy Birthday” song is traditionally sung to celebrate the anniversary of someone’s birth. In 1998, the Guinness Book of World Records proclaimed that very song as the most recognized song in the English language, followed by “For He’s a Jolly Good Fellow.” Its roots can be traced back to a song entitled, “Good Morning to All,” which was written and composed by American sisters and kindergarten teachers, Patty and Mildred Hill in 1893.

Throughout the years, many other versions and styles of the “Happy Birthday” song were created. One of the most famous versions of this song was sung by Marilyn Monroe to then U.S. President John F. Kennedy in May 1962. Another famous version of the song was sung by John Lennon and Paul McCartney. They shifted the melody to a traditional rock song and increased its complexity and style on their unforgettable double album, “The Beatles” (commonly referred to as the “White Album”) in 1968.

Traditionally, birthdays are fun events, but when it comes to taxes, birthdays have a special place. From a tax standpoint, birthdays are not always “fun” and very often are different and not created the same.

The table below contains some important tax birthdays (after the age of 50) that can dramatically affect your income taxes:

It is very important that as you plan for or reach any of these milestone birthdays that you are working with a qualified financial advisor who can review your specific situation to determine what tax reduction strategies would be best for you.

Contact us today to discuss some of these strategies. If you are a Western Pennsylvania resident, schedule a free initial consultation with us by calling us at 412-521-2732.  Residents outside of Southwestern Pennsylvania should call for more information. Jim’s services are available via the phone or through the Internet. Send an e-mail to admin@paytaxeslater.com.

Important Tax Birthdays