FIAs Are Protected When the Market Plunges!

The market plunges!… Wait, it’s going up!… No, it’s down again!…

With all of the recent turmoil, Fixed Indexed Annuity (FIA) owners can breathe a sigh of relief knowing they made a great choice that protects their hard earned money and retirement assets such as their IRAs from sudden market downturns.

An FIA is a tax-deferred opportunity to participate in the upsides of the market without the risks associated with market volatility. With an FIA, your money is protected from market losses.

Key FIA benefits include:

• No Loss of Principal
• Locked in Gains
• A Guaranteed Stream of Income for Life
• Liquidity
• Tax-Advantaged Accumulation
• Crediting Options - You Choose a Crediting Strategy

Unlike variable annuities, which are securities investments, FIAs are safe insurance products and only insurance licensed professionals may offer these safe tools.

Talk to your retirement distribution professional today to determine whether an FIA is an appropriate option to complement your retirement planning strategy.

UBIT Tax and Self-Directed IRAs

What?

Unrelated business taxable income (UBTI) rules could apply to your self-directed IRA, which subjects that income to an unrelated business income tax (UBIT).

Why?

The UBTI rules are a way for the IRS to prevent charities and certain self-directed IRA business activities from having an unfair advantage due to their tax-advantaged status (Congress really intended IRA investments to be passive and not compete with regular businesses).

When?

UBIT applies to the taxable income generated from any unrelated trade or business regularly carried on by an organization. Short-term and intermittent activities are usually exempt but certain seasonal activity is considered “regular” for purposes of this tax.

How much?

If the UBTI rules are triggered by your self-directed IRA, trust tax rates are used so in 2015 a tax of up to 39.6% could be imposed on the income deemed generated by unrelated business that is regularly carried on.

Exclusions from the UBIT tax include:

• Dividends paid to the IRA as a result of the IRA owning C Corporation stock
• Rent from real property
• *be careful not to trigger a prohibited transaction!
• Interest
• Royalties

Examples of self-directed IRA investments that can trigger UBTI rules are:

• Active trade or business (i.e., clothing store, café, gas station)
• Income through Partnerships and Limited Partnerships (LPs)
• Income through Limited Liability Companies (LLCs)
• *If your self-directed IRA invests in a business using a C Corp, UBTI rules aren’t triggered
• Investments that incur debt financing/income from debt financed property

Did You File Your Federal Income Tax Return in 2012?

The IRS reported that approximately $950 million in refunds are currently unclaimed!  It is estimated that over 1 million people who are entitled to a tax refund for 2012 have not filed a tax return with the IRS.  If you didn’t file your 2012 income tax return, you may want to hurry up…there is a 3-year window and the deadline to file so you can collect a 2012 refund is April 18^th of this year! It is important to note that there is no late filing penalty imposed by the IRS if you are owed a refund.

How “Safe” Is Your CD?

Determining the “Real” Rate of Return

Certificates of deposit (CDs) are intended for the ultra-conservative investor. Why are they appealing to so many? They are touted as the “safe” investment option with essentially no risk as they are not tied to the stock market. However, how “safe” are they really if, when you do a little math, you are actually losing out on money due to inflation and taxation?

Knowing the truth about CDs is very important. You can lose purchasing power with a CD when you factor in inflation and taxes. Most banks don’t talk about this aspect and we believe CD owners have a right to know what they really own. The bottom line is, “safety” doesn’t matter a whole lot if your overall rate of return is negative. The “real” rate of return on a CD requires you to factor in inflation (based on the Consumer Price Index [“CPI”]) and your real tax rate.

Here are the hard facts:

• For the past 7 years in a row, the average six month CD rate has been less than 1%.
• For the past 7 years in a row, CDs have earned a negative “real” return.
• CDs have had a negative “real” return for 16 out of the past 30 years.

This is what SEVEN YEARS of bad luck looks like…

Are you happy with your CD rates? There may be CD alternatives available to you that are “safe” options as well…what if you could get the safety of a CD with a guaranteed higher annual rate of return? Is that something we should talk about?

To find out the truth about your CD and other safe options that are available to consumers, give us a call today for a complimentary CD checklist evaluation. This is your hard earned money and we want to help you keep it!

Tax Crunch Q&A

Q: Social Security was my only source of income for 2015, is it taxable?
A: In general, if Social Security is your only income source, benefits are not taxable.

Q: I inherited an IRA from my brother who passed away in February 2015 at age 76. He passed away before taking his 2015 RMD so I took it in October 2015. Is the RMD reported on his estate tax return or my 2015 tax return?
A: Your tax return. Year of death RMDs are reported on the recipient’s tax return.

Q: I retired and transferred all of my 401(k) assets, including highly appreciated employer stock, to an IRA last year. I recently discovered that a Net Unrealized Appreciation (NUA) strategy could give me a huge tax advantage. Since I haven’t filed my tax return yet, may I still elect to use an NUA strategy?
A: No. Unfortunately, once you transferred your highly appreciated employer stock to an IRA, the opportunity to use an NUA strategy was permanently eliminated. To preserve an NUA strategy opportunity, among other requirements, the shares must have been transferred in-kind to a taxable account.

Q: I requested my 2015 RMD on December 31st but I just found out from my IRA custodian that I will get a 1099-R for 2016, not 2015…why?
A: The distribution year is determined by the processing date, which may differ from the date you make a request. It is important to know your IRA custodian’s deadline for processing distribution requests. Some custodians require that distribution requests be submitted no later than mid-December to ensure RMD processing satisfies the December 31st deadline. There is a 50% penalty imposed by the IRS for failing to take a timely RMD.

Q: May I deduct losses in my IRA on my 2015 tax return?
A: Generally no, unless you cash out all your IRAs of the same type. Losses and gains are not taken into account on your tax return while your IRA is still open. You may, however, deduct your Traditional IRA losses only if the total balance that you withdraw is less than the after-tax amounts (basis) in your TIRAs. Your basis is attributed to non-deductible contributions and rollovers of after-tax amounts from qualified plans, 403(b) accounts and 457(b) plans. You also must file IRS Form 8606.

72(t): Substantially Equal Periodic Payments

Substantially Equal Periodic Payments (SEPPs) are also referred to as 72(t) payments. IRA owners who need access to their IRA accounts but are under age 59½ sometimes choose to set up a SEPP plan. Why? Because Internal Revenue Code 72(t) permits a series of substantially equal periodic payments (SEPPs) that are not subject to the 10% early withdrawal penalty.

It is important to make sure you discuss a SEPP strategy with your retirement distribution expert and/or tax professional to make sure a SEPP plan is right for you before initiating one.

Basic SEPP Rules:

• Most modifications are prohibited (there are few exceptions).

• No contributions or additional withdrawals are permitted.

• You can’t rollover SEPP distributions back into the IRA or another IRA.

• You can’t convert SEPP distributions into a Roth.

• Distributions must continue for the longer of a full 5 years or reaching age 59½.

• The minimum 5 year distribution requirement is not waivable and applies regardless of whether your initial need for the money no longer exists.

To illustrate…

Scenario 1:

Assume you just turned 45 years old and start a 72(t) plan. Your SEPPs must continue at least until you are 59½. In this case, at age 59½ you will satisfy both the 5 year minimum distribution and age 59½ requirements.

Scenario 2:

Assume you just turned 58 years old and start a 72(t) plan. Your SEPPs must continue at least through the year you turn 63 years old. In this case, at age 63 you will satisfy both the 5 year minimum distribution and age 59½ requirements.

Disclaiming an Inherited IRA

There are several reasons why someone may choose to disclaim an inherited IRA. However, once that decision is made, it is important for the disclaiming beneficiary to avoid common errors.

In short, a disclaimer is a legal document and formal refusal of an inheritance by a beneficiary. Disclaimer rules apply to all IRA beneficiaries. Beneficiaries are not required to accept an IRA (or any portion thereof) and may instead choose to disclaim all or a portion of their share.

To have a valid disclaimer, the beneficiary must not have accepted or benefitted from the IRA assets or property. The only exception to this rule is the year of death RMD taken for the deceased owner. All disclaimers must be submitted in writing to the IRA custodian within 9 months of the IRA owner’s death.

Disclaimers are irreversible, permanent decisions. Some beneficiaries make the mistake of disclaiming an IRA, with the intent to pass on the disclaimed assets to someone else like their child or spouse. Disclaimed IRA assets may only go to the contingent beneficiary or beneficiaries named by the original owner. Disclaiming beneficiaries have zero control over the disclaimed amounts and how they flow.

Qualified Plan Rollovers and 20% Withholding

A client recently complained that his 401(k) plan sponsor made an error and withheld 20% for taxes when all he did was “roll my funds over to an IRA.” He was under the impression that transferring his 401(k) to his IRA was a tax-free and penalty-free transaction. Ultimately, yes, it would be tax and penalty-free but there’s a small catch…

When a distribution is made from a qualified plan directly to a plan participant, the plan sponsor is required to withhold 20% for federal income tax purposes.

In this case, instead of requesting a trustee-to-trustee transfer or “direct” rollover, the client’s paperwork revealed that he actually requested a distribution of eligible funds from his qualified plan to be paid directly to himself, not to his IRA.

Of course this client can still complete a timely rollover (within 60 days) with the amount he received and use out of pockets funds to make up the difference. Alternatively, he may choose to treat the missing 20% as ordinary taxable income on his return. However, this client is only 52 years old so if he elects to keep the 20% as a distribution, he will owe ordinary income taxes on that amount plus an additional 10% early distribution penalty since he is under 59½ years old.

If you intend to do a simple, tax-free and penalty-free transfer of your qualified plan to an IRA, make sure you have the correct forms and your transfer paperwork is filled out accurately.

If you are confused or are unsure what transfer or rollover forms you need, don’t hesitate to reach out to your local retirement distribution professional for assistance.

2016 IRS Individual v. Trust Income Tax Rates

A Few Key Points about Social Security

When you are deciding when you should begin your Social Security benefit based on your personal circumstance, there are some important things to keep in mind. When you are developing your overall retirement income plan, you should consider your life expectancy/health, projected income needs, whether or not you plan to work and survivor needs.

If you apply for your Social Security benefit early, your benefit will not only start lower but it will stay lower for the rest of your life. Contrary to a myth circulating out there, your Social Security benefit does not go up when you reach age 66. COLAs will magnify the impact of your early or delayed retirement and the longer you expect to live, the more beneficial it is to delay your benefits.

Your decision to start your Social Security benefit impacts survivor benefits as well. Delaying your own benefits may give survivors more income. If you do not think your Social Security benefits will be enough to live on, consider other strategies you may need to explore to supplement your projected benefit.

Your overall retirement strategy should take into consideration Social Security in the context of pensions, IRAs, 401(k)s, your investment portfolio and work related issues to maximize your retirement income.

What is the "Distribution" Phase of Retirement?

At a certain point in our lives, we are faced with important choices that could help defer or mitigate taxes. We spend the majority of our working years saving and accumulating assets, but then what?

As we grow older, we leave a period of relative complacency about money and transition into a more critical period of anxiety and fear during the distribution phase, the time when we begin to tap into our sources of income during retirement.

Careful distribution planning is required lest we drain our assets too quickly or withdraw assets in a tax-inefficient manner. Our asset distribution choices will ultimately dictate the kind of lifestyle we can enjoy when we leave the workforce. Successful distribution planning means understanding the challenges, opportunities and risks associated with this critical time.

Two big fears that many Americans face are 1) running out of money and 2) stock market volatility. The fear of outliving assets and consequently choosing an aggressive investment strategy may not be the best decision. Why? The answer is tied to the other fear – market volatility. It wasn’t so long ago that many hard working people lost a ton in 2008 and 2009 due to market turmoil. Many people had to delay their retirement and continue to work to try and build their portfolios back up as much as they could while knowing they wouldn’t be able to really recapture what had been lost. Understandably, investors still carry an aversion toward any investments that may threaten their principal and expose them to risk.

The good news is that despite increased anxiety about running out of money and losing assets to market volatility, safe choices for investors approaching retirement are greater than ever before. Investors can protect their principal, lock in gains and generate a stream of income that they cannot outlive. Your retirement distribution specialist and tax professional can work with you to identify the right safe options for you and your family.

Even Winners Have To Plan For Taxes

In light of the recent Power Ball fever that swept the nation, it left many wondering how some people who win the lottery, hit a jackpot or have a few Oscar statuettes or Super Bowl rings in their possession seem to go broke so easily. Besides sharing good fortune with family, friends and charities, sometimes those winners forget about their long lost uncle - Uncle Sam.

Donations to qualified charities are one thing, but what happens if you share lottery winnings with your siblings? They may be considered taxable gifts if you exceed the exclusion amount.

What happens if you win an Oscar this month? Having that statuette on your mantle is quite an honor but be careful with that “goodie bag”…award season goodie bags are notorious for being worth thousands or even tens of thousands of dollars and often come with strings attached. The IRS could deem the recipients as “earning” the items and in that case they would not be considered true gifts under IRS rules – it would be taxable income equal to the fair market value of the goodie bag.

A coveted Super Bowl ring may not be worth a whole lot (then again how can you really value bragging rights), but Pro Bowl and Super Bowl earnings can catapult some players into an income tax bracket they aren’t prepared to tackle during post-season. Generous gifts often follow victories so again, taxable gifts need to be considered as well.

The bottom line is you’re never “too rich” or “too savvy” to need sound tax planning guidance from a tax and distribution professional. Too often people lose their fortune as quickly as they win it and don’t seek expert advice until it’s too late.

What is a PLR?

A PLR is a Private Letter Ruling from the IRS. What does that mean exactly? A PLR is a written request a taxpayer submits to obtain some sort of exception to a tax rule. The IRS interprets and applies tax laws to the taxpayer’s specific set of facts. The IRS then makes a statement about the taxpayer’s transaction and this statement is binding upon the IRS as long as the taxpayer accurately described the submitted facts and specifically carries out the transaction as stated.

It is important to note that although a PLR may give some insight as to how the IRS may respond to a specific situation, the IRS’ analysis and decision only applies to the taxpayer who submitted the request. A PLR is not law and it may not be relied upon as a source of authority or legal precedent by anyone else.

Who Pays the Gift Tax?

If you give a non-spouse a gift valued in excess of the annual exclusion amount, you could be subject to a gift tax. For 2016, the annual federal gift tax exclusion amount for gifts to a non-spouse remains at $14,000 per person. If you are married, you and your spouse may give up to $28,000, per person, per year, free from federal gift tax.

Although there are no immediate tax concerns for the recipient of a gift because federal gift tax is imposed upon the donor, the recipient could be liable for capital gains tax in the future. Highly appreciated gifts such as real estate or stocks will render the recipient liable for capital gains tax when he or she decides to sell the gift at a later date.

The general rule is that the recipient’s basis in the gifted property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (which was also his/her basis) and you later sold it for $100 per share, you would pay tax on a gain of $90 per share.