Orlando Estate & Elder Law

When the IRS Speaks, Retirees Need to Listen

The IRS embarked on a big awareness campaign since the summer, telling taxpayers they should review and update their withholding numbers at work to ensure that they are paying enough federal income tax. But they’re not the only ones who should be checking their numbers, reports CNBC in the article “The IRS is warning retirees of this impending surprise tax.” Retirees who fail to update withholding from pensions or annuities may be in for a surprise, and it won’t be a good one.

It’s easier to say people should do this, than for them to do it, however.

Once people leave the workplace, they start drawing down income from several different sources. That usually means Social Security, IRAs, pensions and annuities.

While they were working, they didn’t have to think about income taxes, unless they were self-employed. Their payroll company or HR department took care of that.

Now, they must pay estimated taxes every quarter to the IRS.

There are two issues: making sure you remember to pay the tax on a timely basis and making sure that you pay the correct account. Some accounting firms send their clients reminders.  However, that doesn’t always do the job.

How can you make this easier?

There are new withholding tables from the IRS. Speak with your accountant. Make sure you have enough money set aside for quarterly tax payments.

If you’re single and your AGI (Adjusted Gross Income) plus nontaxable interest and half of your Social Security benefits are more than $34,000 (or $44,000, if you’re married), as much as 85% of your Social Security benefits could be taxed. If that seems like a lot, you’re right.

One alternative: use the IRS Form W-4V to withhold a flat rate from each check. Depending on your situation, you can withhold 7%, 10%, 12% or 22%.

If pension or annuity payments are an income source, you can also have taxes withheld from your income, using IRS Form W-4P, and chose the number of allowances you want to claim.

Work with your accountant to get a clear picture of your tax liability and do that now. If you want to avoid a nasty tax surprise in the spring, get it all done well before the end of 2018. You must know what you will need to pay. Especially for new retirees, it’s not easy to figure it out.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: CNBC (Sep. 12, 2018) “The IRS is warning retirees of this impending surprise tax”

Retiring Overseas? The IRS Is Still Watching

“Retirees living abroad have to take special care with their tax returns. If you forget to check it off this box on Schedule B when you live overseas, it could mean big trouble with the IRS.”

It’s something you don’t hear discussed often, but there are people who like to hide money overseas. Others just love the idea of retiring to a European country where they can live out a life-long dream. However, according to a recent article from CNBC titled “How to retire overseas and avoid IRS penalties,” Congress enacted the Foreign Account Tax Compliance Act, or FATCA, in 2010 expressly to increase tax compliance by Americans, who keep financial assets outside of the U.S.

FATCA works through what is called “dual reporting.” Other countries agree to report on assets owned by American account holders. Those living outside of the U.S. must report honestly what they have in those foreign bank accounts every year, when they file their income taxes.

For people who are not big-time tax evaders hiding large amounts of money offshore and make an honest mistake, it can become a nightmare.

One client forgot to tell his accountant about an account with $3,500 that he owned in a foreign bank. The penalties were stiff. An attorney who was experienced in tax situations faced by people living outside of the U.S. had to be retained.

Here’s the thing: most automated tax preparation programs default to answering “No” on Schedule B, where the person filling out the form is asked if they have a bank account in a foreign country.

Who has to file? All Americans living overseas are required to file a tax return. It doesn’t matter if you pay foreign taxes, or even if the U.S. has a tax treaty with the country.

In addition to a 1040 form, you must file additional forms for the foreign earned income exclusion or the foreign tax credit form.

The only exception might be if you receive Social Security benefits and have no other income sources. That is a “might,” though—check with your CPA!

Some people choose to retire outside of the U.S.  in the hope of keeping healthcare costs manageable.  However, any gains from having lower healthcare costs would evaporate quickly in the face of tax penalties from the IRS.

Be certain to work with a CPA who has experience in overseas tax requirements and FBAR rules (Report of Foreign Bank and Financial Accounts).

Remember that the form is very specific: if you have any overseas accounts, you must report them to the IRS. It doesn’t matter how large or small they are.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: CNBC (Aug. 25, 2018) “How to retire overseas and avoid IRS penalties”

Fifty-Something? Here's Your Checklist

“Your 50s are a time of transition. Many workers reach their peak earning years in their 50s, having found their ideal career niche.”

The 50s are the time of life when your kids are starting to become more independent and may have already moved out. If that’s true, you may have a little more disposable income. That presents a good opportunity to ramp up your retirement savings, advises Sioux City Journal in the article “In Your 50s? Do These 3 Things to Plan for Your Retirement.”

Unfortunately, many people who turn 50 start thinking now is the time to retire early, go on extravagant vacations or buy themselves big ticket items that they’ve always wanted. A better approach: consider this a time to make the most of your income, keep saving for retirement and stay on a steady course.

Use the catch-up options available to you. The federal government knows that many people don’t have the means or the motivation to save for retirement until later in their careers. That’s why there are several provisions in the tax laws that let you catch up, once you reach 50.

• You can put away an additional $1,000 above the annual contribution limit to an IRA.
• You can add $6,000 in annual contribution to 401(k)s and similar employer-sponsored plans after age 50.
• Once you pass your 55^th birthday, you can make an additional $1,000 annual contribution to health savings accounts.

If you’ve got the cash to spare, these are great opportunities.

Educate yourself about Social Security. Many people rely on Social Security for their retirement, while others use it as a safety net. You’ll want to start learning about the rules.  

When you take your first benefits has an impact on how much you’ll receive over your lifetime. Yes, you can start at age 62, but the difference in the amount you’ll get at 62 versus 70 is substantial. If you plan to keep working indefinitely, maximizing earnings is the best way to boost your Social Security benefits.

Get access to savings in the early years of retirement. If you can afford to retire in your 50s, know when you can tap your retirement savings. If you’ve used regular taxable accounts to invest your savings, it won’t matter when you make withdrawals. However, if your money is locked up in 401(k)s, SEPs, IRAs and other tax favored accounts, you’ll need to know the rules. Penalties for taking withdrawals before the specified age, can take a big bite out of your retirement accounts.

It is hard to think about working every day for another 10 years or 20 years, once you’ve celebrated your 50^th birthday.  However, keeping these three key ideas in mind as you plan for the future will help put you in the best financial state possible.

Another post-50^th birthday task? Meet with an estate planning attorney and make sure you have a current will and other legal documents to protect yourself and your loved ones.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Sioux City Journal (Aug. 25, 2018) “In Your 50s? Do These 3 Things to Plan for Your Retirement”

Fiscal Advice From Empty Nester

“There is no doubt that, for the most part, parents are much more involved with their children and their children’s more numerous activities, than parents were when I was growing up.”

If this describes you and your kids, then you need to prepare yourself for the adjustments that happen when the last child leaves the house. It can be emotionally and financially challenging, according to the Daily Messenger in the article “John Ninfo: Some advice for empty nesters”

With one less person in the household, it’s time to re-adjust your budget. Many of your everyday expenses such as electricity, food and gas, will likely be lower. However, you may have new expenses related to your new life. You may spend more on activities that were put off until the kids grew up or find yourself dining out more often. Go slow when it comes to spending money on pricey vacations or fancy dinners. You want to strike a balance between enjoying your new-found freedom and cash flow as well as keeping retirement savings in mind.

Assuming your cash flow is easier now it’s time to commit to paying down outstanding debts, especially credit card debt. Reduce any interest or finance charges that you can. You might even think about paying down your mortgage or paying off a high-interest car loan. If you’ve taken on student loans or a home equity loan, now is the time to try to knock those down. At the same time, try to minimize any new spending or borrowing.

Take another look at how your retirement saving is progressing. Will you have enough at your current rate of spending, or should you ramp up your efforts, if you have room in your budget?

Have you thought about downsizing, or decluttering? Even if you are not planning on moving, your home may be filled with things you don’t need or want anymore. Set some time aside to clear out what you don’t need, donate what you can to a local charity or start planning yard sales. You don’t have to tackle this project all at once.  It is possible to donate a few hours each weekend to the task.

When was the last time you updated your will and other estate planning documents? Now is the time to revisit these matters, as well as looking at any long-term care insurance. If you don’t have a long-term policy in place, this is the time to buy it—if you can.

Are you finding yourself with a lot of free time? We don’t often ask ourselves the important questions, like “What matters to me?” and “How do I want to be remembered?” Many people find the answers to those questions in service to others. If you’re not already volunteering with an organization, find the ones that resonate with your values and get involved.

Don’t immediately start on expensive home renovations or decorations. Give yourself time to adjust to a quieter house and think about where you want to invest those resources before spending. A redecorating project is fun but may be making yourself busy and filling time. The project may not actually be affordable.

The empty nest presents many new opportunities for a fresh start. Use them wisely.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: Daily Messenger (August 26, 2018) “John Ninfo: Some advice for empty nesters”

Social Security Goes Hand-in-Hand With Retirement Accounts

“Most Americans enter retirement age with access to Social Security benefits. Many people also have Individual Retirement Accounts, including those that were funded by transferring money from workplace 401(k) plans.”

One trick to a successful retirement is to make your Social Security benefits coordinate optimally with your Individual Retirement Accounts (IRAs), says AZ Central in the article “Retirement planning: Connecting the dots between Social Security and IRAs.”

Not everyone takes a step back to think this way.  However, it is a smart thing to do. With proper planning, your retirement could lead to better results for your investments and a better decision on when to take Social Security benefits.

First, viewing Social Security as part of your investment portfolio is easy to do but not that widely followed. If you think of your Social Security benefits as a conservative portion of your overall investment portfolio, it may give you a little leeway to be more aggressive with investments than you might otherwise be. Remember to acknowledge your comfort level with the amount of risk, so you can sleep at night.

Social Security retirement benefits are very low risk, since they pay steady, government backed income with no market fluctuations. You don’t want to make a dramatic portfolio shift based on this, but you might change up your equity exposure by 5% to 10% of your portfolio, assuming that you’ve been risk averse up to now.

If you already have ample growth investments, thinking of Social Security as part of your overall portfolio might give you reason to trim your equity holdings. By using Social Security as your backstop, your investments may not need to work as hard and you don’t have to put yourself in a risky position.

How about tapping IRAs early, to avoid claiming Social Security benefits until as late as possible? It’s not a bad idea, since the payout from Social Security grows at 8% each year you wait, up to age 70. Most retirees start taking Social Security earlier, then get locked into a lower benefit.

If your income is lower in your 60s, your income taxes will be lower, so the level that your IRA withdrawals will be taxed will also be lower.

What about the stability of Social Security? It’s not certain that Social Security will remain fully funded without some government intervention. The latest annual report from the Social Security trustees estimates that if no changes are made, the system will be paying most but not all promised benefits by 2034, when the “trust fund” money runs out.  However, as long as Americans are working and payrolls are generating money for Social Security, benefits will be available to pay future retirees.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: AZ Central (Aug. 26, 2018) “Retirement planning: Connecting the dots between Social Security and IRAs”

Top Retirement Threats

“Four types of expenses can wreak havoc with your retirement.”

Retirement is a balance between enjoying your golden years, taking good care of your health and balancing your finances, so you don’t run out of income too early. However, as reported by MD Magazine in the recent article “Four Big Retirement Threats and How to Protect Yourself,” there are challenges ahead, some of which you can control, others requiring preparation.

Threat One: Premature death of a spouse and loss of Social Security or pension income. The loss of one Social Security check can have a significant impact on the household’s income. This is also true with the loss of a private pension. Both spouses need to be aware of how their retirement income will be generated and what will happen, when one spouse passes away.

Life insurance can be used to make up for the lost income. If you are young enough, buy term insurance. If you are older, consider cash-value policies, like whole life. Make sure that both spouses are familiar with household finances. Put together a list of your checking, savings, investment and credit card accounts.

Threat Two: Healthcare Costs. Medicare simply does not cover everything. Even a Medicare Advantage plan doesn’t cover everything. That includes long-term care, dentistry, vision care, hearing aids, eyeglasses or private nursing. There’s a “donut hole” in prescription coverage, so if you need pricy drugs you’ll need to budget at least $5,000 annually. If you underestimate the cost of healthcare, you could go through your medical budget fast.

Perfect health at 55 is no guarantee for what’s to come.

One solution is making the most of a Health Savings Account (HSA). You can save for future medical expenses and get a tax deduction for contributions. Even better—there’s no income tax on withdrawals for qualified medical expenses. Check with your employer, since HSAs are usually part of an employee benefits plan. You must have a high-deductible heath plan and can’t be on Medicare to qualify for an HSA.

Threat Number Three: Inflation According to the U.S. Bureau of Labor Statistics, inflation has averaged about 4% annually over the last 50 years. In 20 years, today’s $1 will be worth only 46 cents. Make sure your investment portfolio is diversified. Remember that your retirement could last several decades, so it may not be wise to abandon equities during retirement.

Threat Number Four: Outliving Your Savings. This sounds like a good problem, but it is still a problem. The longer you live, the longer you are expected to live. According to the IRS life expectancy tables, a 30-year-old can expect to live to age 83.  However, if you are 65 years old now, you can expect to live until age 86. The solution is to do periodic planning to make sure your retirement accounts and investments are keeping up with your living expenses. Give yourself a cushion, in case you live far past your expectations.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Reference: MD Magazine (Aug. 2, 2018) “Four Big Retirement Threats and How to Protect Yourself”

Spouses Be Smart About Social Security

“A report shows that 82% of surviving spouses could have collected a higher benefit, if they restricted their application to survivor benefits and waited until the age of 70 to claim their own retirement benefits.”

Losing a spouse at any time in life is difficult. However, losing a spouse while you are retired also presents some serious financial challenges. A recent article in Kiplinger, “Maximize Social Security benefits for surviving spouses,” explores the steps that a surviving spouse can take to make sure they are receiving the most Social Security benefits possible. There’s a right way and several wrong ways to do this.

If you are widowed before claiming Social Security benefits, there are options to maximize Social Security payments by coordinating the timing of claims and survivor benefits.

If you don’t know about this, don’t count on Social Security to tell you about mixing and matching the benefits. A report issued early in 2018 by the Social Security Administration’s Office of the Inspector General found that as many as 82% of surviving spouses taking benefits could have received a higher monthly benefit by restricting their application to survivor benefits only and delaying taking their own benefits up to age 70.

Without restricting an application, a beneficiary eligible for both benefits receives the highest one to which they are entitled.

Not knowing about how to maximize survivor benefits can put a big hole in monthly income. The report projects that the Social Security Administration underpaid about $132 million to more than 9,000 beneficiaries age 70 and older, and in the coming years it will underpay more than 2,000 additional beneficiaries who are under age 70 – by about $9.8 million, once they reach age 70.

Educate yourself about how this works. Surviving spouses need to consider whether they can make the most of their benefits by taking the survivor benefit first, and later switching to their own benefit, or by taking their own benefit first and then switching to a survivor benefit. The key factor to consider in this equation: How much either benefit can grow.

You can claim a survivor benefit as early as age 60, or age 50 if disabled.  However, it is reduced if it is claimed before the survivor’s full retirement age. It won’t grow past the survivor’s full retirement age. The most a surviving spouse will receive is 100% of the benefit the deceased spouse received or was eligible to receive at his death.

Run the numbers and do the math. Once you figure out which number will grow the most, you may want to delay that benefit. The amounts and the age you claim could make a big difference in the quality of your retirement.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Resource: Kiplinger (Aug. 7, 2018) “Maximize Social Security benefits for surviving spouses”

It's Not Too Late: Six Things To Boost Retirement

“If everyone saved a decent chunk of their income throughout their career and never dipped into savings to deal with emergencies, all could enjoy a cushy retirement.”

In a perfect world, we’d all have saved enough by age 60 to relax about money and start planning our golden years.  However, in reality, says Bankrate.com, most people find themselves rapidly approaching retirement with not nearly enough savings. Some key suggestions are covered in “6 last-minute retirement planning strategies.” No, they’re not as good as a lifetime of steady savings, but they’re better than nothing.

Start saving like crazy. Reduce all discretionary spending and put anything and everything you can into your retirement accounts. If you’re over 50, you can add a catch-up contribution to your annual IRA limit of $6,5000—giving you a maximum contribution in 2018 of $24,500. If you exceed the limit, put the money into a savings account. Just be sure to save it.

Consider a shift to your investment portfolio. If your investments are all in low interest rate CDs or bonds, you may want to make a change.  This could involve modest moves up on the risk scale that could make a difference. Make moderate changes. Big shifts are never a good idea.

Keep working.  While you are able to work, you aren’t drawing money from your retirement accounts, so investments have more time to grow. Working longer also gives you more time to add to those funds. Delaying retirement also increases the income you’ll get from Social Security.

Change your retirement budget. If you thought you were going to spend your retirement living high, rethink that. If you don’t have enough saved, you will likely have to cut expenses. If you have, for example, $400,000 saved for retirement and are used to spending $50,000 annually, your savings won’t last much past eight years (ignoring any investment gains).

If you cut your spending in half, your savings will last 16 years, and if your investments do any growing, so will your overall portfolio. If you can’t make that much of a cut, consider part-time employment. Many retirees today are using this time to pursue careers they once considered a hobby, or simply taking lower-paying, less stressful jobs to round out their household budgets.

Sell your home. If you have a lot of equity in your home, consider selling your home and using the proceeds to add to your retirement account. Rent or buy a smaller home or move to an area where home costs are lower. You may also consider a reverse mortgage, which lets you continue to live in the house, while receiving monthly income.

Be sure to protect your retirement accounts with an estate plan that includes a will, power of attorney and healthcare directive. An estate plan is important for all retirees, whether their assets are large or small. Consider it an investment in your future.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Resource: Bankrate.com: (July 25, 2018) “6 last-minute retirement planning strategies”

Ahead of the Curve or Behind the Eight Ball?

“It's difficult to determine exactly how much to save for retirement. Some people pick a round number, such as saving 10% or 15% of their salary, while others use an external cue, such as the amount of money that will be matched by an employer.”

Are you saving enough for retirement, asks US News & World Report in the article “Are Your Retirement Savings Ahead of the Curve?” Maybe the better question to ask is more specific: How much income do you think you’ll need to replace your salary to pay for your chosen retirement lifestyle? Remember that even when you are not working, you’ll still need to cover healthcare costs, car replacements, home repairs and the everyday expenses that add up quickly.

Here are some important points to help you as you plan for retirement income:

Make the most of your 401(k). The top contribution limit to a 401(k) for 2018 is $18,600. Workers over 50 and up can add catch-up contributions of an additional $6,000. That means if you can swing it, you can contribute $24,500 in 2018. Fully funding this account also gets you the best possible tax deductions. Few people did this in 2017, according to a Vanguard analysis. Of those who do, most of them earn more than $100,000 annually and are closer to retirement age.

Can you get to $1 million in your 401(k)? People who start early and save consistently over time can accumulate big bucks in their retirement accounts. People with 10 or more years on the job, have an average balance of $210,000, nearly four times as much as the average of $53,000 for those with four to six years at a company, says the Vanguard data. A report from Fidelity echoes those numbers, with employees who work for a longer time period, saving an average of $290,000 and after 15 years, an average of $379,000.

Take advantage of catch-up contributions. Research from T. Rowe Price Retirement Plan Services says that only 12% of eligible 401(k) plan participants made catch-up contributions in 2017. It’s not that easy to do, but well worth it for your retirement success. One strategy? When you get a raise or a bonus, put that money into your 401(k) plan.

Do better than your peers in savings. The amount that people can save increases as they age. However, if you want to be ahead of the curve, use 10% of your income as a target rate, if you aren’t sure how much you want to put away for your golden years. Vanguard analyzed ages and account balances and found that people saved more in their 401(k)s, as retirement got closer. People in the 35-44 age bracket saved 5.4%, those in the age 45–54 age bracket saved 7%, people in the 55-64 age bracket saved 8.3% and those age 65 and over saved 9%.

If you shoot for 10% of your income, you’ll be way ahead of the retirement savings curve.

Another way to be ahead of the curve, is to have your estate plan updated to make sure it aligns with your life, as you go through various stages. If you don’t have an estate plan, contact an experienced estate planning attorney to take care of this important matter.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Resource: US News & World Report (July 23, 2018) “Are Your Retirement Savings Ahead of the Curve?”

More Ways to Save For Retirement

“From well-known options, like IRAs and 401(k)s, to more obscure ones, like Cash Balance Pension Plans or Rich people Roths, these accounts can help you to grow your savings.”

Most people work at a company that offers them a way to contribute to a retirement account, usually an IRA.  However, there are more options available, according to a recent article from Forbes titled “10 Retirement Accounts You Should Know About.”

Few of us need less money in our retirement accounts. Most of us enjoy the tax benefits we get from retirement accounts. Americans, in general, do a terrible job of saving for retirement. Some say the IRA, Roth IRA and other similar accounts were created to give us an incentive to do a better job. The tax advantages of these accounts make it more attractive to sock away money every year. These accounts were also set up with deliberate penalties, so people wouldn’t raid their accounts every time they needed a few extra dollars.

If you are among those who work for companies that have a retirement savings plan match, make the most out of it. If you put in the annual percentage or amount your plan requires, your employer will match that contribution. Most workers walk away from this money.  However, it’s free money!

Employees usually are offered a 401(k), 403(b) or 457 plan from their employer. The financial institution is already chosen, the money is automatically taken out of your paycheck and often you can only make decisions about what kind of funds you can select at certain times of the year. In 2018, you can contribute up to $18,500. If you’re 50+, you can make an additional $6,000 contribution, known as a catch-up contribution.

Self-employed? You need a retirement plan more than someone who works for a company. Self-employed people have many more options. If you need help, talk to your CPA. There may be some plans that are better suited or have more tax advantages than others.

For self-employed people, the basic choices are the solo 401(k) for a sole proprietor or someone working with their spouse. You can make contributions as both the employer and the employee. You could contribute as much as $55,000 in 2018 (or, if you are 50+, $61,000). Your total contributions are determined by your net business income.

Another choice for retirement savings for the self-employed is a SEP IRA, the Simplified Employee Pension. It’s easier to set up than a 401(k)and is typically used by people with self-employment income or small business owners. As the employer, you can contribute up to a quarter of your income, or $55,000, or whichever is less. There are no catch-up contributions for a SEP IRA.

Self-employed or working for a company, your retirement plan needs to include an estate plan. Your estate planning attorney will be able to help you with a will, power of attorney and healthcare directive. She will also be able to give you valuable insights, as to how your retirement plan and your estate plan can work together to minimize taxes and maximize the estate you leave behind.

For more information about estate planning in Orlando, FL (and throughout the rest of Central Florida), visit our estate planning website and be sure to subscribe to our complimentary estate planning e-newsletter while you are there.

Resource: Forbes July 23, 2018 “10 Retirement Accounts You Should Know About”