Goals for Retirement Planning

Kris L. Pearce, CPA, Tax Senior

There are lots of items to think about when planning for retirement.  The earlier in your career this is done the better, and it can always be adjusted over time.  Any plan should be discussed with your spouse as well as your attorney, financial advisor, and accountant. In addition your plan should be reviewed when there is life changing moments, such as the birth of a child, marriage, or divorce.  

Each item below should be given a number between 1 and 5 with 1 being the least important and 5 being the most important to you.  After ranking, discuss each item with the individuals above to make sure the planning being done agrees with what is most important to you. 

1.  At what age do you want to retire and with how much income 
2.  Achieve a certain return on investment 
3. Provide for your favorite charity 
4. Provide financial security for loved ones 
5. Fund education for generations after you 
6. Provide safety net for items such as loss of job, death of spouse, or disability 
7. Maintain flexibility in the overall plan 
8. Avoid probate and other associated costs 
9. Avoid disputes among family members
10. Avoid the complexity of the plan 

This is not an exhaustive list but something to get you started if retirement planning has not been on your radar.  Finally, remember to discuss with loved ones so they are aware of what is important to you.

Is Your College Student a Dependent? Maybe Not…

Elizabeth W. Beauboeuf, Tax Associate

Now that your high school graduate is almost finished with his or her first semester of college, one thing that probably isn’t on your mind is if your child will still be a dependent on your tax return.  While the answer might be yes, there are several things to keep in mind. 

One of the four tests that a student must meet to be a dependent on your tax return is the Support Test.  The student cannot provide more that one-half of his own support, and the parents must provide more than one-half of the student’s support. 

Here are some items to keep in mind: 

• Support includes food, shelter, clothing, medical and dental care, education, and other similar items.
• If the student purchases a vehicle, the fair market value is considered student-provided support.
• Loans in the student’s name are treated as support provided by the student.
• Scholarships that a student receives can be excluded from the support test. 

Why does it matter?  Often, parents pay tax at a higher rate on earned income than the student, which means they could receive a greater tax benefit (i.e., greater tax savings) from the exemption deduction, high education tax credits such as the American Opportunity credit or Hope Credit, or the tuition and fees deduction. 

For more information on who is considered a dependent, check out this blog: http://amdcpa.com/graymatterblog/tax/am-i-a-dependent-or-not/

Private Foundations, Perpetual or Limited?

Lauren N. Blaies, Tax Associate

In the past, wealthy, philanthropic individuals have set up private foundations to last indefinitely. They wanted to establish a legacy, create long-term awareness, provide continuous funding for a charity, or continue family involvement after death.  This is still the preferred time span for most private foundations, but there is a common shift to a more limited lifespan.  

At the time when the foundation is formed, a clear mandate needs to be proposed stating either a limited or perpetual life so successor trustees have a set guideline to follow. The limited life foundations can be set up to end so many years from a specific date, or so many years after a founder’s date of death.     

Why are the limited-life foundations becoming increasingly popular? A main reason is that it ensures adherence to the intended mission upon which it was originally founded. They can also address an urgent need of a specific charity or cause with a more direct focus. The foundation can make a greater impact during an individual’s life (while they have primary control over the foundation). It is also more economically efficient to have a limited-life.  Due to decreases in the attorney, accounting, and trustee fees that would incur each year.  Also, instead of forcing family members into a philanthropic role, it assumes that future generations may want to create their own foundations and support their own philanthropic missions. 

For the obvious reasons mentioned, foundations are increasingly being set up as a limited-life rather than a standard perpetual life.  It is a decision that needs to be made by the founder. Choosing a limited-life term rather than a perpetual term is another step in the planning process for potential foundations.

Planning Tips for those Approaching the IRA Required Minimum Distribution Age

Kris Pearce, CPA, Tax Senior 

There are many things to consider when approaching 701/2 the age for required minimum distributions from IRAs.  The following is just brief summary of some of the items that should be discussed with your attorney, accountant, and financial advisors in the year leading up to the first RMD. 

How do you Plan on Using the Money?
Will it be used to live off of, provide for a spouse, or will the money be used to pass onto the next generation?  These are important questions to ask for a couple of reasons.  If the money is going to be used to live off of, it is important to determine how much needs to be withdrawn, it might be more than the minimum required.  If the money is going to be passed on to the next generation it is important to think about how to reinvest the money after withdrawing the required amount. 

Have you Checked your Beneficiaries?
Make sure the correct individuals are listed as your beneficiaries.  This will help with post death planning and also ensure that the assets are directed to the correct individuals.  It is also important to look at this after major life events, such as death, divorce, marriage, or birth of children/grandchildren. 

Do you have More than one IRA?
It is important to determine which IRA you want to withdraw the funds from.  Distributions are computed separately but the money can be withdrawn from one account rather than a bucket of money coming out of each account. 

Do you have a favorite charity?�
If so, consider using retirement plan assets to fund charitable gifts.  For 2011, up to $100,000 RMD can go toward a charity.  You don’t receive a charitable deduction on schedule A, but the RMD is not taxed so it will result in tax savings. 

These are just a summary of some of things to consider, it is important to discuss these items with all of your advisors as well as your family.

When should I begin taking Social Security?

Deidra A. Doerr, CPA, Tax Supervisor

The first three installments of this series covered the basics of retirement benefits, who is entitled to receive payments, and factors that lead to a reduction (or increase) in benefits.  This leads us to the age-old (or old-age rather) question, when is the best time for me to apply for Social Security benefits? 

Delaying retirement until age 70 may seem like the smartest decision because you receive 132% each month of the FRA benefit, but keep in mind that you are missing out on four years of payments (66 being the FRA).  The idea of not receiving payments at all is what spurs most workers to file for SS at the earliest age possible even if the benefit is 75% of the FRA benefit.  Based on actuarial studies, if you do not think you will live past the age of 79 or you have health problems, it is usually best to apply for benefits at 62. 

As mentioned in the second installment, the age that the worker files will affect the amount of the spousal benefit.  If the worker applies for benefits early, the spousal benefit is also reduced to 75%.  If the spouse applies at 62, the benefits are reduced further – the system comprehends two early retirements.  The delaying of SS payments works the same way, but benefits are increased. 

In order to maximize the household SS benefit, the current age and the earnings of each spouse during their work history needs to be considered.  For instance, a couple is the same age and worker was a high earning individual and the spouse did not work.  It is more beneficial for the worker to delay taking SS and for the spouse to take as early as possible.  The second installment mentioned that the spouse could not apply for benefits until the worker was at FRA or had already applied.  Therefore, the non-working spouse should file at his or her FRA (or when the worker applies- whichever comes sooner) and the worker should delay until age 70.

Let’s consider the scenario that both spouses worked and earned SS credits.  The lower-earning spouse should apply for early benefits at 62 and the higher-earning spouse should defer until age 70.  The reason this plan generates the most household benefit is because the lower-earning spouse can apply based on their own benefits at age 62.  Then, upon the FRA of the higher-earning spouse, the lower-earning spouse will receive the higher of the two benefits – their own worker benefit or the spousal benefit from the high-earning spouse. 

The decision of when to take SS benefits depends on several, albeit confusing, factors, but I hope this blog has laid out suggestions for basic situations.  The most important items to keep in mind when making this decision are: consider the affect on your spouse’s benefits, how long you plan on working, and how long you expect to live.

How Does Applying at Certain Ages Affect My Benefit?

Deidra A. Doerr, CPA, Tax Supervisor

The first two installments of this series covered the basics of retirement benefits and who is entitled to receive payments.  This leads us to discuss the consequences of applying at different ages and what affect that has on the amount of your monthly SS payment. 

From the information in the first installment, you know the different ages at which you are eligible to apply for SS benefits.  Your monthly benefit is determined based on your full retirement age (FRA).  If you file early, you face a reduction in benefits of 70-75% depending on your year of birth.  On the other hand, if you defer until the age of 70, you can receive payments of 130-132% of your FRA benefit.  Keep in mind that you can apply for SS at any age after 62, but there is no benefit of delaying past age 70.  Your benefits will be adjusted based on how close you are to the FRA on either side. 

Another item to consider is if you plan on actually retiring or if you still plan to work.  For those who want to continue working AND receive SS benefits, there is an earnings limit to contend with.  If you have not reached your FRA, you can only earn $14,160 ($14,640 in 2012) a year to avoid a reduction in benefits.  The reduction is $1 of benefit for every $2 your earnings exceed the limit.  Once you reach your FRA, you can make up to $37,680 ($38,880 in 2012) in the year of turning 66 before a reduction occurs.  The good news is that there is no limit on earnings after reaching FRA. 

Because Social Security is an intricate system, it has taken three entries to cover the basics of who is eligible and how benefits are determined.  Our final blog will answer the most important question – “When should I begin taking Social Security?”

Who is Entitled to Social Security Benefits?

Deidra A. Doerr, CPA, Tax Supervisor

In the first installment of the Social Security series, we covered the basics of the retirement benefit for workers that have contributed to OASDI.  Not only are those who have paid into SS eligible to receive benefits; spouses, children, and survivors are entitled to receive payments – no wage or contribution history required. 

Below is a list of those who can apply to receive benefits based on a worker’s SS credits.  Not to worry, the act of anyone claiming benefits using your SS credits does NOT reduce your benefit. 

1. Spouses are entitled to half of the worker benefit beginning at age 62 in the year that the worker applies for benefits or the year the worker reaches FRA – whichever is earlier.  The spouse is not required to have ever earned SS credits to receive spousal benefits.
2.  Ex-spouses are entitled to half your worker benefit if he or she is at least 62 years old, was married to you for 10 years and has been divorced from you for at least two years, and unmarried at the time of application.
3. Minor children can receive benefits if their parent is already receiving SS.  This scenario is becoming more prevalent as people enter into marriages with spouses that are much younger. 
4. Survivors include spouses, ex-spouses, children, and the parent of your children and he or she is entitled to the same amount as the worker. 

Another note related to spousal benefits, the SSA will always allow the larger benefit.  For instance, if your spouse has also worked, then they are eligible to receive benefits based on their own credits as well as your benefits.  The SSA will calculate which is higher upon application and payments will be made according to the higher amount.  It is important to keep in mind that the worker’s decision of when to apply directly affects the spousal benefits.  In the next installment, we will discuss the what factors reduce your Social Security benefit.

The Basics of Social Security

Deidra A. Doerr, CPA, Tax Supervisor

Social Security has been mentioned in the news quite often in the past couple of years.  Reduced contribution rates, budget deficits, and the idea that it may not even exist in the future have received plenty of media coverage.  However, most of us are still unsure of how Social Security really works.  Let’s cover the basics. 

The most common type of Social Security (SS) benefit that comes to mind is the retirement benefit.  Even though there are other types of SS benefits, we will limit our focus to those created by retirement.  You must apply for retirement benefits and you should do so when it is most advantageous for you.  There are three options which are related to your age:

1. Full Retirement Age (FRA) between 66 and 67
2. Early at age 62
3. Delayed at the age of 70 

You can apply to receive benefits at any age after you turn 62 and your monthly payment will be adjusted accordingly.  A later installment will discuss the age at which you should apply. 

The insured individual is referred to as the worker which means that he or she has earned SS credits by “making contributions” by way of OASDI withholding taxes.  Besides the worker’s retirement benefit, spouses – even divorced spouses, minor children, and the survivors of a deceased worker can receive SS.  Keep a look out for the next installment that covers who is entitled to SS benefits in greater detail.

Roth IRA Recharacterization Deadline is Approaching!

Jenny L. Meyer, MBA, CPA/ABV, Senior Manager, Tax

For those taxpayers that converted their traditional IRA to a Roth IRA in 2010, October 17, 2011 is the last day you are able to recharacterize.  Recharacterization is the “undo feature” of roth conversions.  Each taxpayer is allowed to reverse their roth conversion and transfer these funds back to a traditional IRA at absolutely no tax cost.  It is as if the conversion never happened. 

If you are considering a recharacterization, here are some important points to keep in mind: 

1.  Recharacterizations can only be done as a direct transfer of funds. 
2. If you already filed your 2010 individual return, you must amend in order to report the recharacterization and reduction in taxable income. 
3. For only 2010 conversions, the IRS allowed a two year deferral.  If the roth is recharacterized, this two year deferral is lost for good. 
4. Watch out for RMDs!  If you are subject to required minimum distributions, you calculate these distributions using your traditional IRA account balance as of December 31^st.  When you recharacterize back to a traditional IRA, your 2010 year-end balance just increased affecting your 2011 RMD calculations.  You may have to take an additional distribution before year end. 

It is always best to speak with your advisors before making these decisions.  There is only a little left.  The recharacterization transaction must be completed by October 17, 2011.

Prognostications with Jonathan Blattmachr

John C. Scott, CPA/ABV, AEP, Tax Partner

Hosted by Children’s Legacy Advisors of St. Louis Children’s Hospital, Jonathan G. Blattmachr was in St. Louis last week to update local advisors on the new and temporary estate and gift tax rules.  I was fortunate to join him for lunch before the event along with Steve Cupples, a partner with Thompson Coburn, and Jan Rogers from St. Louis Children’s Hospital Foundation. 

Jonathan previewed the major topics in his presentation and he also introduced me to the blog of futurist entrepreneur, Ray Kurzweil (www.kurzweilai.net). 

Besides reminding us that intra family transfers should always be made in trust, he also opined that the administration does not intend to wait for the expiration of the temporary estate and gift tax rules to expire on December 31^st, 2012.  Rather he believes the administration will champion the following proposals this fall to achieve deficit reduction: 

• Reduce Estate Tax Exemption amount to $3.5 million
• Reduce Gift Tax Exemption amount to $1 million
• Increase Estate and Gift tax rates to 45%
• Elimination of Lack of Control and Marketability Discounts for Holding Companies including Family Limited Partnerships and Closely Held operating businesses
• Requirement for grantor retained annuity trust to have minimum 10 year terms 

None of these ideas are new, however I am surprised by the possibility of additional radical changes to the rules as early as this fall.  Any successful proposals would be effective when the bill is signed by the President. 

I signed up for Kurzweil’s newsletter so I can keep up with ever increasing advancements in science and technology.