How To Protect Assets From The Nursing Home

When a family member has a health event that requires them to enter a nursing home or need full-time home health care, it can be an extremely stressful financial event for their spouse, children, grandchildren, or caretaker.  The monthly cost of a nursing home is typically between $10,000 - $15,000 per month and without advanced planning it often requires a family to spend through almost all of their assets before they qualify for Medicaid. 

As we all live longer, we become more frail in our 80’s and 90’s, which increases the probability of a long term care event occurring.  Many individuals that we meet with have already experienced a long term care event with their parent or grandparents and they have seen first hand the painful process of watching them spend through all of their assets.  For couples that are married, it can leave the spouse that is not in need of care in a very difficult financial situation as pensions, social security, and martial assets have to be pledged toward the cost of the care for their spouse.  For individuals and widows, the burden is placed on their family or friends to scramble to liquidate assets, access personal financial records, and watch the inheritance for their heirs be depleted in a very short period of time. 

I often ask my clients this simple question, “Would you rather your house and assets go to your kids or go to the nursing home?”  As you would guess, most people say “my kids”.  With enough advanced planning you have that choice and today I’m going to walk you through some of the strategies that we use with our clients to protect assets from long term care events. 

Strategies Vary State By State

Since the Medicaid rules vary from state to state, the strategies that I'm presenting in this article can be used by New York State residents. However, if you are resident of another state, this article will still help you to understand asset protection strategies that are commonly used but you should consult with an elder law expert in your state to determine the appropriate application of these strategies. 

Long Term Care Insurance

While having a long term care insurance policy in place is ideal because if a long term event occurs it pays out and covers the cost, there are a number of challenges associated with long-term care insurance including: 

• Insurance companies will rarely issue policies after you reach age 70

• If you have any issues within your health history, they may not issue you a policy

• The cost of the policies can be expensive

It’s not uncommon for a good long-term care insurance policy to cost an individual between $4,000 and $6,000 per year.  The reason why the insurance is more expensive than other types of insurance is there is a high likelihood that if you live past age 65, at some point you will experience a long term care event.  Insurance companies don’t like that. Insurance companies like issuing policies for events that have a low probability of occurring, similar to life insurance.  In addition, when these long term care policies pay out, they pay out big dollar amounts because the costs are so high.  For these reasons, long-term care insurance policies have become more of a luxury item instead of a common solution that is used by individuals and family to protect their assets from a long term care event.

So if you don’t have a long-term care insurance policy, what can you do to protect your assets from a long-term event? 

Establish A Medicaid Trust

If an individual does not have a long term care insurance policy to help protect against the cost of a long term care event, the next strategy to consider is setting up a Medicaid Trust to own their non-retirement assets.  Non-retirement assets can include a house, investment account, stocks, non-qualified annuities, permanent life insurance policies, and other assets not held within a Traditional IRA or other type of pre-tax retirement account.  This is how the strategy works: 

• Establish a Medicaid Trust

• Transfer assets from the individual’s name into the name of the trust

• Assets are held in the trust for at least 5 years

• The individual experiences a long term care event requiring them to enter a nursing home

• Since the trust has owned the assets for more than 5 years, they are no longer countable assets, the individual can automatically qualify for Medicaid as long as their assets outside of the trust are below the asset allowance threshold; Medicaid pays the nursing home for their care, and the trust assets are preserved for the spouse and their heirs.

Medicaid 5 Year Look Back Period

In New York, Medicaid has a 5 year look back period.  The 5 year look back period was put into place to prevent individuals from gifting away all of their assets right before or after they experience a long term care event in an effort to qualify for Medicaid.  In 2020, New York requires residents to spend down all of their countable assets until they are below the $15,750 asset allowance threshold.  Once below that level, the individual qualifies for Medicaid, and Medicaid will pay the nursing home costs.  When an individual submits a Medicaid application, they request 5 years worth of financial records. If that individual gave any asset away within the last five years, whether it’s to a person or a trust, those asset will be brought back in as “countable assets” required to be spent down before the individual will qualify for Medicaid. 

Example:  Jim is 88 years old and has $100,000 in his savings account. His health is beginning to deteriorate and he gifts $90,000 to his kids in an effort to reduce his assets to qualify for Medicaid.  Two years later Jim has a stroke requiring him to enter a nursing home, and only has $10,000 in his savings account.  When he applies for Medicaid, they will request 5 years worth of his bank records and discover that he gifted $90,000 away to his kids two years ago.  That $90,000 is a countable asset subject to spend down even though he no longer has it.  But it gets worse, his kids spent the $90,000, so they are unable to return the $90,000 to Jim. Jim is not eligible for Medicaid and there is no cash available to pay for his care. 

Medicaid Trust Strategy

For the Medicaid Trust strategy to work, the assets have to be put into the trust 5 years prior to submission of the Medicaid application.  Once the assets are owned by the trust for more than 5 years, regardless of the dollar value in the trust, it’s no longer a countable asset, and the individual can automatically qualify for Medicaid. 

Example: At age 84, Jim sets up an Medicaid trust, and moves $90,000 of his $100,000 in cash into the trust.  At age 90, Jim has a stroke requiring him to enter a nursing home, but now since the assets were in the trust for more than 5 years, he is no longer required to spend down the $90,000, and he qualifies for Medicaid. That $90,000 is now reserved for his kids who are the beneficiaries of the trust. 

Establishing a trust instead of gifting assets away to family members can help to preserve those assets against the situation where the individual does not make it past the 5 year look back period and the money gifted has already been spent by the beneficiaries. 

How Do Medicaid Trusts Work?

Medicaid trusts are considered “irrevocable trusts” which means when you move assets into the trust you technically do not own them anymore.  By setting up a trust, you are essentially establishing an entity, with it’s own Tax ID, to own your assets.  The thought of giving away assets often scares individuals away for setting up these trusts but it shouldn’t.   Estate attorneys often include language in the trust documents to offer some flexibility.  Before I go into some examples, I first want to define some trust terms: 

Grantor:  The grantor is the person that currently owns the assets and is now gifting it (or transferring it) into their trust.  If for example, you are doing this planning for your parents, they would be the “grantors” of the trust. 

Trustee:  The trustee is the individual or individual(s) that are responsible for managing the assets owned by the trust.  This is typically not the grantor.  The reason being is if you gift your assets to a trust but you still have full control of it, the question arises, have you really given it away?   In most cases, the grantor will designate one or more of their children as trustees.  The trustees are responsible for carrying out the terms of the trust 

Beneficiaries:   The beneficiaries of the trust are the individuals that are entitled to receive the assets typically after the grantor or grantors have passed away. It’s common for the beneficiaries of the trust to be the same as the beneficiaries listed in a person’s will. 

Access to Income

When you gift assets to a Medicaid trust, you technically no longer have access to the principle, but grantors still have access to any “income” generated by the trust assets.  This is most easily explained as an example. 

Mark & Sarah have traditional IRA’s, their primary residence, and an investment account with a value of $200,000.  They do not anticipate needing to access the $200,000 to supplement their income and want to protect that asset from a long term care event so they know that their kids will inherit it.  They establish a Medicaid trust with their two children designated a co-trustees and they move the ownership of the house and the $200,000 investment account into the name of the trust.  If the holdings in the $200,000 investment account are producing dividend and interest income, Mark & Sarah are allowed to receive that income each year because they always have access to the income generated by the trust, they just can’t access the principal portion of the trust assets. 

Revoke Part Of The Trust

Estate attorneys may also build in a feature which allows the trustees to “revoke“ all or a portion of the trust assets.  Let’s build on the Mark & Sarah example above: 

Mark and Sarah gift their house and the $200,000 investment account to their Medicaid trust but two years later Sarah incurs an unforeseen medical event and they need access to $50,000.  Since the trustee was given the power to revoke all or a portion of the trust asset, the trustee works with the estate attorney to revoke $50,000 of the trust assets in the investment account and send it to the grantors (Mark & Sarah).  The $150,000 remaining in the investment account continues to work toward that 5 year look back period, and Mark & Sarah have the money they need for the medical expenses. 

Gifts To The Beneficiaries

An alternative solution to the same scenario listed above is that the trustees can be given the power to gift assets to the beneficiaries while the grantors are still alive.  Essentially the trustees, who are often also the beneficiaries of the trust, gift themselves assets from the trust, and then turn around and gift those assets back to the grantors.  In the Mark & Sarah example above, instead of revoking part of the trust assets, their children, who are the trustees, gift $50,000 to themselves, and then turn around and gift $50,000 to their parents (Mark & Sarah) to pay their medical bills. But with gifting powers, you really have to trust the individuals that are serving as trustees of your Medicaid trust because they cannot be required to gift the money back to the grantor. 

Putting Your House In The Trust

It's common for individuals to think:  “Well all I have is my house, I don’t have any investment accounts, so there is no point in setting up a trust because my house is always protected.”  That's incorrect.  If you own your house and you experience a long term care event: 

• Your primary residence is not a countable assets for Medicaid eligibility and you can qualify for Medicaid while still owning your house

• Medicaid cannot force you to sell your house while you or your spouse are still alive and then spend down those assets for your care

However, and this is super important, even though your primary residence is not a countable asset and they can't force you to sell it while you or your spouse are still alive, Medicaid can put a LIEN against your house for the amount that they pay the nursing home for your care.  So when you or your spouse pass away, the value of your house is included in your estate, Medicaid will force the estate to sell the house and they will recapture the amount that they paid for your care. 

Example:  Linda’s husband Tim passed away three years ago and she is the surviving spouse.  Her only asset is the primary residence that she lives in worth $250,000 with no mortgage. Linda has a stroke and is required to enter a nursing home. Because she has no other assets besides her primary residence, she qualifies for Medicaid, and Medicaid pays for the cost of her care at the nursing home.  Linda passes away 2 year later.  During that two year period in the nursing home, Medicaid paid $260,000 for her care.  Linda's children, who were expecting to inherit the house when she passed away, now find out that Medicaid has a lien against the house for $260,000; meaning when they sell the house, the full $250,000 goes directly to Medicaid, and the kids receive nothing. 

If Linda had put the house into a Medicaid trust 5 years prior to her stroke, she would have immediately qualified for Medicaid, but Medicaid would not be entitled to put a lien against her primary residence. When she passes away, since the house is owned by the trust, there is no probate, and her children receive the full value of the house. 

Again, the way I phrase this to my clients is, would you rather your kids inherit your house or would you rather it go to the nursing home?  With some advance planning you have a choice. 

The Cost of Setting Up A Trust

The other factor that has scared some people away from setting up a Medicaid trust is the setup cost.  It’s not uncommon for an estate attorney to charge between $3,000 - $8,000 to setup a Medicaid trust. But in the example that we just looked at above with Linda, you are spending $5,000 today to setup a trust, that is going to potentially protect an asset worth $250,000. 

The next objection, “well what if I spend the money setting up the trust and I don’t make it past the 5 year look back period?”   If that’s the case, the $5,000 that you spent on setting up the trust is just $5,000 less that nursing home is going to receive for your care.  To qualify for Medicaid, you have to spend down your assets below the $15,750 threshold so if you have countable assets above that amount, you would have lost the money to nursing home anyway. 

Countable Assets

I have mentioned the term “countable assets” a few times throughout this article; countable assets are the assets that are subject to that Medicaid spend down.   Instead of going through the long list of assets that are countable it's easier to explain which assets are NOT countable.  The value of your primary residence is not a countable asset even though it's subject to the lien.   Pre-tax retirement accounts such as Traditional IRA’s and 401(k) plans are not countable assets.   Pre-paid funeral expenses up to a specific dollar threshold are also not a countable asset. Outside of those three assets, almost everything else is a countable asset. 

Retirement Accounts

As I just mentioned above, pre-tax retirement accounts are not subject to the Medicaid spend down, however, Medicaid does require you to take required minimum distributions (RMD’s) from those pre-tax retirement accounts each year and contribute those directly to the cost of your care. Notice that I keep saying “pre-tax”, that’s because Roth IRA’s are countable assets subject to spend down.  If you have $100,000 in a Roth IRA, Medicaid will require you to spend down that account until you reach the $15,750 in total countable assets qualifying you for Medicaid. 

Pensions & Social Security

You can use Medicaid trusts to protect assets but they cannot be used to protect “income”.  Monthly pension payments and Social Security income are subject to the Medicaid income threshold.  For individuals that are single or widowed, your income has to below $875 per month in 2020 to qualify for Community Medicaid and below $50 per month for Chronic Care Medicaid.  If an individual is receiving social security, pensions, or other income sources above that threshold, all of that income automatically goes toward their care. 

If you are married and your spouse is the one that has entered the nursing home, you are considered the “community spouse”.  As the community spouse you are allowed to keep $3,216 per month in income. 

Example:  Rob and Tracey are married, Rob just entered the nursing home, but Tracey is still living in their primary residence. Their monthly income is as follows: 

Rob Social Security:         $2,000

Tracy Social Security:      $2,000

Rob Pension:                     $3,000

Total Monthly Income:  $7,000

Of the $7,000 in total monthly income that Tracey is used to receiving, once Rob qualifies for Medicaid, she will only be receiving $3,216 per month. The rest of the monthly income would go toward Rob’s care at the nursing home. 

Community Spouse Asset Allowance

If you are married and your spouse has a long term care event requiring them to go into a nursing home and you plan to apply for Medicaid, you as the community spouse are allowed to keep countable assets up to the greater of: 

• $74,820; or

• One-half of the couple’s total combined assets up to $128,640 (in 2020)

Take Action

Unless you have a long term care insurance policy or enough assets set aside to offset the financial risk of a long term care event occurring in the future, setting up a Medicaid trust may make sense.   But I also want to provide you with a quick list of considerations when establishing a Medicaid trust: 

• You should only transfer assets to the trust that you know you are not going to need to supplement your income in retirement.

• Step up in basis: By establishing a Medicaid trust as opposed to gifting assets directly to individuals, the estate attorney can include language that will allow the assets of the trust to receive a step up in basis when the grantor passes away which can mitigate a huge tax hit for the beneficiaries.

• For these strategies to work it takes advanced planning so start the process now. Each asset that is transferred into the trust has its own 5 year look back period. The sooner you get the assets transferred into the trust, the sooner that clock starts.

• If you are doing this planning for a parent, grandparent, or other family member, it's important to consult with professionals that are familiar with the elder law and Medicaid rules for the state that the individual resides in. These rules, limits, and trust strategies vary from state to state.

Contact Us For Help If you are a New York resident doing this type of planning for yourself or for a family member that is a resident of New York, please feel free to reach out to us with questions.  We can help you to better understand how to protect assets from a long term care events and connect you with an  estate attorney that can assist you with the establishment of Medicaid trust if the trust route is the most appropriate strategy for asset protection. Disclosure:  This article is for educational purposes only.  It does not contain legal, Medicaid, or tax advice. You should consult with a professional for advice tailored to your personal financial situation. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Requesting Mortgage Forbearance: Be Careful

Due to the rapid rise in the unemployment rate as a result of the Coronavirus, Congress passed the CARES Act which includes a provision that provides mortgage relief to homeowners that have federally-backed mortgages.  Homeowners are eligible for a 180 day forbearance on their mortgage payments which can provide much needed financial relief for individuals and families that are struggling due to the COVID-19 containment efforts.   Even if you do not have a federally-back mortgage, some banks are voluntarily offering homeowners forbearance options on their mortgage payments. But before you choose this option, you should be aware of the following items: 

• How does forbearance work?

• Who qualifies for mortgage forbearance?

• What is the process for requesting a forbearance?

• Does forbearance hurt your credit score?

• What are the repayment options?

• The hidden costs of forbearance

• Other options for mortgage relief

How Does Mortgage Forbearance Work?

Mortgage forbearance allows homeowners to defer monthly mortgage payments for a specific period of time.  Under the CARES Act, homeowners that qualify, will be able to delay their mortgage payments for the next 6 months.  But it’s important to understand that “forbearance” delays mortgage payments, it does not forgive those payment.  At some point in the future, you will have to make up for those missed payments. 

Who Is Eligible For Mortgage Forbearance?

Under the CARES Act, homeowners that have federally-backed mortgages are eligible for a forbearance up to 180 days.  But as I mentioned above, homeowners that do not have federally-backed mortgages may also be eligible but it’s at the discretion of the loan servicer.  How do you know if you have a federally-backed mortgage?  Here is a list of the federal agencies: 

• FHA

• VA

• Freddie Mac

• Fannie Mae

• USDA

Do You Have A Government Backed Mortgage?

If you are not sure whether or not your mortgage is backed by the federal government, there are a few ways to find out but we recommend not blindly calling the bank that issued your mortgage.  The bank that issued your mortgage may be different than the company that “services” your mortgage.  It’s not uncommon for lenders to sell the servicing rights of their mortgages to other companies.  If you are considering applying for forbearance, you will need to consult with the loan servicer. 

As you can image, these loan servicing companies are being overwhelmed right now with homeowners requesting forbearance of their mortgage payments.  If you are able to determine whether or not you have a federally-backed mortgage yourself, it will save you time and frustration.  Here are a few different ways to determine if your mortgage is backed by a federal agency: 

• FHA Insurance Payments: If you look at your mortgage statement and you see FHA insurance payments being made, your loan is backed by the FHA. You can also look at your mortgage closing documents, specifically your HUD form.

• Fannie Mae & Freddie Mac Websites: Almost 50% of all mortgages issued in U.S. are backed by either Fannie Mae or Feddie Mac. You can run a search on their websites to determine if your mortgage is backed by either of those two agencies.

Fannie Mae Website

Freddie Mac Website

• Contact Loan Servicer: If you are still unable to determine whether or not your mortgage is federally-backed, you can contact your loan servicer. The contact information for your loan servicer is usually listed on your monthly mortgage statement but if you don’t have access to your statement, you may be able to locate your loan servicer via the Mortgage Electronic Registration System

Mortgages Not Backed By A Federal Agency

If your mortgage is not backed by a federal agency, you still may be eligible for a mortgage forbearance but that will be at the complete discretion of your loan servicing company.  You will need to contact your loan servicer but unlike federally-backed loans, they are not required to offer you a forbearance.   You should be prepared to answer a number of questions such as: 

• Why are you applying for the forbearance?

• How long do you need the forbearance for?

• Details about the status of your income, expenses, and employment

The Forbearance Process

Whether you have a federally-backed mortgage or not, you will have to pro-actively reach out to your loan servicing company to request the forbearance; it does not happen automatically.  If you qualify for the forbearance, there are two key pieces of information that you should obtain before that call is finished. 

• Determine the repayment terms for those missed payments

• Request your forbearance agreement in writing

Repayment Options

Since you have to repay these missed mortgage payments at some point in the future, it’s incredibly important to understand the terms of the repayment.  Some loan servicing companies are requesting a “balloon payment” which means if you are granted a 6 month forbearance, when you reach the end of that 6 month period, all of the missed mortgage payments are due in a lump sum amount; not a favorable situation for most homeowners.  Here are the three most common repayment options: 

• Balloon Payment: All of the missed payments are due as a single lump sum payment at the end of the forbearance term. This is the least favorable option for homeowners.

• Extended Term: This option extends the term of your mortgage by the length of the forbearance. If you receive a 3 month forbearance and you have a 30 year mortgage, they will extend the term of your 30 year mortgage by an additional 3 months. This is usually the most favorable option for borrowers.

• Re-amortize The Loan: Unlike the “extend the term” option, the maturity date of your mortgage stays the same, and when you restart mortgage payments at the end of the forbearance period, they spread those missed payments over the remaining life of the mortgage. This will result in a slightly higher mortgage payment compared to your mortgage payment prior to the forbearance period.

Get The Forbearance Offer In Writing

With all of these moving parts, it’s extremely important to request that your loan servicer sends you the forbearance agreement in writing.  You definitely want to make sure nothing was missed or miscommunicated otherwise you could damage your credit score, end up in a foreclosure situation, or have an unexpectedly large mortgage payment waiting for you at the end of the forbearance period. 

Does Mortgage Forbearance Affect Credit?

If done correctly, a mortgage forbearance will not negatively impact your credit score. 

Hidden Cost of Forbearance

While there are no late fees assessed on these missed mortgage payments associated with a forbearance agreement, there is additional interest that accumulates over the remaining life of the mortgage when the repayment option involves either an extended term or re-amortization. 

Example:  Homeowner has a $250,000 federally-backed mortgage, 4% interest rate, with 20 years left on the mortgage.  This homeowners was financially impacted by COVID-19 and is granted a 6 month forbearance with an extended term repayment. How much additional mortgage interest did that individual pay over the remaining life of the mortgage due to that 6-month forbearance? 

Answer:  $3,159 

So this option is not “free” by any means but it may be a reasonable price for homeowners to pay compared to the negative financial impact of missing mortgage payments without forbearance. 

Other Options Beside Forbearance

If your bank does not grant you forbearance, or you want to consider other options, the CARES Act did open up other forms of financial relief to taxpayers in the form of: 

• Penalty Free Distributions From IRA’s & 401(k) Plans

• 401(k) Loans Up To $100,000

• IRS Stimulus Checks

Each option has it’s own pros and cons but you can read more about these options via the links above. 

Michael Ruger

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Should I Refinance My Mortgage Now?

Should I Refinance My Mortgage Now?

With all the volatility going on in the market, it seems there is one certainty and that is the word “historical” will continue to be in the headlines.  Over the past few months, we’ve seen the Dow Jones Average hit historical highs, the 10-year treasury hit historical lows, and historical daily point movements in the market.  Market volatility will always lead the headlines as it does impact anyone with an investment account.  With that in mind, it is important to use these times to reassess your overall financial plan and take advantage of parts of the plan that are in your control.

For a lot of people, their home is their most significant asset and is held for a longer period than any stock or bond they may have.  This brings us back to “historical” as mortgage rates continue to drop.  Whenever this happens, our clients will call and ask if it makes sense to refinance.  In this article, we will help you in making this decision.

3 Important Questions

• How much will I be saving annually in interest with a lower rate?

• What are the closing costs of refinancing?

• How long do I plan on being in the home and how many more years do I have on the mortgage?

If you can answer these questions, then you should have a pretty good idea if it makes sense for you to refinance.

How Much Will I be Saving Annually in Interest with a Lower Rate?

With most financial decisions, dollars matter.  So how do you determine how much you will be saving each year with a lower interest rate?  Below, I walk through a very basic example, but it will show the possible advantage of the refinance.

One important note with this example is the fact that most loan payments you make will decrease the principal which should decrease the cost of interest.  To make this simple, I assume a consistent mortgage balance throughout the year.

                Higher Interest                                                                                 Lower Interest

Mortgage Balance:          $300,000                                            Mortgage Balance:          $300,000

Interest Rate:                    4.5%                                                      Interest Rate:                    3.5%

Annual Interest:               $13,500                                                 Annual Interest:               $10,500

By refinancing at the lower rate, the dollar savings in one year was $3,000 in the example when the mortgage balance was $300,000.

Savings over the life of a mortgage at 3.5% compared to 4.5% on a $300,000, 30-year mortgage, should be over $60,000 in interest over that time period if you are making consistent monthly payments.

What are the Closing Costs of Refinancing?

After walking through the exercise above, most people will say “Of course it makes sense to refinance”.  Before making the decision, you must consider the cost of refinancing which can vary from person to person and bank to bank.  There are several closing costs to consider which could include title insurance, tax stamps, appraisal fee, application fees, etc.

If the cost of closing is $5,000, you will have to determine how long it will take you to make that back based on the annual interest savings.  Using the example from before, if you save $3,000 in interest each year, it should take you 2 years to breakeven.

One tip we give clients is to start at your current lender.  Banks are in competition with other banks and they usually do not want to lose business to a competitor.  Knowing the current interest rate environment, a lot of institutions will offer a type of “rapid refinance” for existing customers which may make the process easier but also give you a break on the closing costs if you are staying with them.  This should be taken into consideration along with the possibility of getting an even lower interest rate from a different institution which could save you more in the long run even if closing costs are higher.

How Long do I Plan on Being in the Home and How Many More Years do I have on the Mortgage?

This is important since there is a cost to refinancing your mortgage.  If it will take you 10 years to “breakeven” between the closing costs and interest you are saving but only plan on being in the house for 5 more years, refinancing may not be the right choice.  Also, if you only have a few years left to pay the mortgage you would have to weigh your options.

In summary, taking advantage of these historical low mortgage rates could save you a lot of dollars over the long term but you should consider all the costs associated with it.  Taking the time to answer these questions and shop around to make sure you are getting a good deal should be worth the effort.

Public Service Announcement:  Like the stock market, it is hard to say anyone has the capability of knowing for sure when interest rates will hit their lows.  Make sure you are comfortable with the decision you are making and if you do refinance try not to have buyer’s remorse if the historical lows today turn into new historical lows next year.  

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

New Rules For Non Spouse Beneficiaries Of Retirement Accounts Starting In 2020

The SECURE Act was signed into law on December 19, 2019 and with it comes some very important changes to the options that are available to non-spouse beneficiaries of IRA’s, 401(k), 403(b), and other types of retirement accounts starting in 2020.  Unfortunately, with the passing of this law, Congress took away one of the most valuable distribution options available to non-spouse beneficiaries called the “stretch” provision.  Non-spouse beneficiaries would utilize this distribution option to avoid the tax hit associated with having to take big distributions from pre-tax retirement accounts in a single tax year.  This article will cover: 

• The old inherited IRA rules vs. the new inherited IRA rules

• The new “10 Year Rule”

• Who is grandfathered in under the old inherited IRA rules?

• Impact of the new rules on minor children beneficiaries

• Tax traps awaiting non spouse beneficiaries of retirement accounts

The “Stretch” Option Is Gone

The SECURE Act’s elimination of the stretch provision will have a big impact on non-spouse beneficiaries. Prior to January 1, 2020, non-spouse beneficiaries that inherited retirement accounts had the option to either:

• Take a full distribution of the retirement account within 5 years

• Rollover the balance to an inherited IRA and stretch the distributions from the retirement account over their lifetime. Also known as the “stretch option”.

Since any money distributed from a pre-tax retirement account is taxable income to the beneficiary, many non-spouse beneficiaries would choose the stretch option to avoid the big tax hit associated with taking larger distributions from a retirement account in a single year.   Under the old rules, if you did not move the money to an inherited IRA by  December 31st of the year following the decedent’s death, you were forced to take out the full account balance within a 5 year period.

On the flip side, the stretch option allowed these beneficiaries to move the retirement account balance from the decedent’s retirement account into their own inherited IRA tax and penalty free.  The non-spouse beneficiary was then only required to take small distributions each year from the account called a RMD (“required minimum distribution”) but was allowed to keep the retirement account intact and continuing to accumulate tax deferred over their lifetime. A huge benefit!

The New 10 Year Rule

For non-spouse beneficiaries, the stretch option was replaced with the “10 Year Rule” which states that the balance in the inherited retirement account needs to be fully distributed by the end of the 10th year following the decedent’s date of death.  The loss of the stretch option will be problematic for non-spouse beneficiaries that inherit sizable retirement accounts because they will be forced to take larger distributions exposing those pre-tax distributions to higher tax rates. 

No RMD Requirement Under The 10 Year Rule

Even though the stretch option has been lost, beneficiaries will have some flexibility as to the timing of when distributions will take place from their inherited IRA.  Unlike the stretch provision that required the non-spouse beneficiary to start taking the RMD’s the year following the decedent’s date of death, there are no RMD requirements associated with the new 10 year rule. Meaning in extreme cases, the beneficiary could choose not to take any distributions from the retirement account for 9 years and then in year 10 distribute the full account balance.

Now, unless you love paying taxes, very few people would elect to distribute a large pre-tax retirement account balance in a single tax year but the new rules give you a decade to coordinate a distribution strategy that will help you to manage your tax liability under the new rules.

Tax Traps For Non-Spouse Beneficiaries

These new inherited IRA distribution rules are going to require pro-active tax and financial planning for the beneficiaries of these retirement accounts. I’m lumping financial planning into that mix because taking distributions from pre-tax retirement accounts increases your taxable income which could cause the following things to happen: 

• Reduce the amount of college financial aid that your child is receiving

• Increase the amount of your social security that is considered taxable income

• Loss of property tax credits such as the Enhanced STAR Program

• Increase your Medicare Part B and Part D premiums the following year

• You may phase out of certain tax credits or deductions that you were previously receiving

• Eliminate your ability to contribute to a Roth IRA

• Loss of Medicaid or Special Needs benefits

• Ordinary income and capital gains taxed at a higher rate

You really have to plan out the next 10 years and determine from a tax and financial planning standpoint what is the most advantageous way to distribute the full balance of the inherited IRA to minimize the tax hit and avoid triggering an unexpected financial consequence associated with having additional income during that 10 year period. 

Who Is Grandfathered In?

If you are the non-spouse beneficiary of a retirement account and the decedent passed away prior to January 1, 2020, you are grandfathered in under the old inherited IRA rules. Meaning you are still able to utilize the stretch provision.   Here are a few examples:

Example 1: If you had a parent pass away in 2018 and in 2019 you rolled over their IRA into your own inherited IRA, you are not subject to the new 10 year rule.  You are allowed to stretch the IRA distributions over your lifetime in the form of those RMD’s.

Example 2:  On December 15, 2019, you father passed away and you are listed as the beneficiary on his 401(k) account. Since he passed away prior to January 1, 2020, you would still have the option of setting up an Inherited IRA prior to December 31, 2020 and then stretching the distributions over your lifetime.

Example 3:  On February 3, 2020, your uncle passes away and you are listed as a beneficiary on his Rollover IRA. Since he passed away after January 1, 2020, you would be required to distribute the full IRA balance prior to December 31, 2030.

You are also grandfathered in under the old rules if:

• The beneficiary is the spouse

• Disabled beneficiaries

• Chronically Ill beneficiaries

• Individuals who are NOT more than 10 years younger than the decendent

• Certain minor children (see below)

Even beyond 2020, the beneficiaries listed above will still have the option to rollover the balance into their own inherited IRA and then stretch the required minimum distributions over their lifetime. 

Minor Children As Beneficiaries

The rules are slightly different if the beneficiary is the child of the decedent AND they are still a minor.  I purposely capitalized the word “and”.   Within the new law is a “Special Rule for Minor Children” section that states if the beneficiary is a child of the decedent but has not reached the age of majority, then the child will be able to take age-based RMD’s from the inherited IRA but only until they reach the age of majority. Once they are no longer a minor, they are required to distribute the remainder of the retirement account balance within 10 years.

Example:  A mother and father pass away in a car accident and the beneficiaries listed on their retirement accounts are their two children, Jacob age 10, and Sarah age 8.  Jacob and Sarah would be able to move the balances from their parent’s retirements accounts into an inherited IRA and then just take small required minimum distributions from the account based on their life expectancy until they reach age 18.  In their state of New York, age 18 is the age of majority.  The entire inherited IRA would then need to be fully distributed to them before the end of the calendar year of their 28th birthday.

This exception only applies if they are a child of the decedent. If a minor child inherits a retirement account from a non-parent, such as a grandparent, then they are immediately subject to the 10 year rule.

Note: the age of majority varies by state.

Plans Not Impacted Until January 1, 2022

The replacement of the stretch option with the new 10 Year Rule will impact most non-spouse beneficiaries in 2020.  There are a few exceptions to that effective date: 

• 403(b) & 457 plans sponsored by state and local governments, including Thrift Savings Plans sponsored by the Federal Government will not lose the stretch option until January 1, 2022

• Plans maintained pursuant to a collective bargaining agreement also do not lose the stretch option until January 1, 2022

Advanced Planning

Under the old inherited IRA rules there was less urgency for immediate tax planning because the non-spouse beneficiaries just had to move the money into an inherited IRA the year after the decedent passed away and in most cases the RMD's were relatively small resulting in a minimal tax impact.   For non-spouse beneficiaries that inherit a retirement account after January 1, 2020, it will be so important to have a tax plan and financial plan in place as soon as possible otherwise you could lose a lot of your inheritance to higher taxes or other negative consequences associated with having more income during those distribution years. 

Please feel free to contact us if you have any questions on the new inherited IRA rules.  We would also be more than happy to share with you some of the advanced tax strategies that we will be using with our clients to help them to minimize the tax impact of the new 10 year rule. 

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Potential Consequences of Taking IRA Distributions to Pay Off Debt

Potential Consequences of Taking IRA Distributions to Pay Off Debt

Once there is no longer a paycheck, retirees will typically meet expenses with a combination of social security, withdrawals from retirement accounts, annuities, and pensions.  Social security, pensions, and annuities are usually fixed amounts, while withdrawals from retirement accounts could fluctuate based on need.  This flexibility presents opportunities to use retirement savings to pay off debt; but before doing so, it is important to consider the possible consequences.

Clients often come to us saying they have some amount left on a mortgage and they would feel great if they could just pay it off.  Lower monthly bills and less debt when living on a fixed income is certainly good, both from a financial and psychological point of view, but taking large distributions from retirement accounts just to pay off debt may lead to tax consequences that can make you worse off financially.

Below are three items I typically consider before making a recommendation for clients.  Every retiree is different so consulting with a professional such as a financial planner or accountant is recommended if you’d like further guidance.

Impact on State Income and Property Taxes

Depending on what state you are in, withdrawals from IRA’s could be taxed very differently.  It is important to know how they are taxed in your state before making any big decision like this.  For example, New York State allows for tax free withdrawals of IRA accounts up to a maximum of $20,000 per recipient receiving the funds.  Once the $20,000 limit is met in a certain year, any distribution you take above that will be taxed.

If someone normally pulls $15,000 a year from a retirement account to meet expenses and then wanted to pull another $50,000 to pay off a mortgage, they have created $45,000 of additional taxable income to New York State. This is typically not a good thing, especially if in the future you never have to pull more than $20,000 in a year, as you would have never paid New York State taxes on the distributions.

Note:  Another item to consider regarding states is the impact on property taxes.  For example, New York State offers an “Enhanced STAR” credit if you are over the age of 65, but it is dependent on income.  Here is an article that discusses this in more detail STAR Property Tax Credit: Make Sure You Know The New Income Limits.

What Tax Bracket Are You in at the Federal Level?

Federal income taxes are determined using a “Progressive Tax” calculation.  For example, if you are filing single, the first $9,700 of taxable income you have is taxed at a lower rate than any income you earn above that.  Below are charts of the 2019 tax tables so you can review the different tax rates at certain income levels for single and married filing joint ( Source: Nerd Wallet ).

There isn’t much of a difference between the first two brackets of 10% and 12%, but the next jump is to 22%.  This means that, if you are filing single, you are paying the government 10% more on any additional taxable income from $39,475 – $84,200.  Below is a basic example of how taking a large distribution from the IRA could impact your federal tax liability.

How Will it Impact the Amount of Social Security You Pay Tax on?

This is usually the most complicated to calculate.  Here is a link to the 2018 instructions and worksheets for calculating how much of your Social Security benefit will be taxed ( IRS Publication 915 ).  Basically, by showing more income, you may have to pay tax on more of your Social Security benefit.  Below is a chart put together with information from the IRS to show how much of your benefit may be taxed.

To calculate “Combined Income”, you take your Adjusted Gross Income + Nontaxable Interest + Half of your Social Security benefit.  For the purpose of this discussion, remember that any amount you withdraw from your IRA is counted in your Combined Income and therefore could make more of your social security benefit subject to tax.

Peace of mind is key and usually having less bills or debt can provide that, but it is important to look at the cost you are paying for it.  There are times that this strategy could make sense, but if you have questions about a personal situation please consult with a professional to put together the correct strategy.

About Rob……...

Hi, I’m Rob Mangold. I’m the Chief Operating Officer at Greenbush Financial Group and a contributor to the Money Smart Board blog. We created the blog to provide strategies that will help our readers personally, professionally, and financially. Our blog is meant to be a resource. If there are questions that you need answered, please feel free to join in on the discussion or contact me directly.

Do I Have To Pay Tax On A House That I Inherited?

Do I Have To Pay Tax On A House That I Inherited?

The tax rules are different depending on the type of assets that you inherit. If you inherit a house, you may or may not have a tax liability when you go to sell it. This will largely depend on whose name was on the deed when the house was passed to you.  There are also special exceptions that come into play if the house is owned by a trust, or if it was gifted with the kids prior to their parents passing away. On the bright side, with some advanced planning, heirs can often times avoid having to pay tax on real estate assets when they pass to them as an inheritance. 

Step-up In Basis

Many assets that are included in the decedent’s estate receive what’s called a step-up in basis. As with any asset that is not held in a retirement account, you must be able to identify the “cost basis”, or in other words, what you originally paid for it. Then when you eventually sell that asset, you don’t pay tax on the cost basis, but you pay tax on the gain.

Example:  You buy a rental property for $200,000 and 10 years later you sell that rental property for $300,000.  When you sell it, $200,000 is returned to you tax free and you pay long-term capital gains tax on the $100,000 gain.

Inheritance Example: Now let’s look at how the step-up works. Your parents bought their house 30 years ago for $100,000 and the house is now worth $300,000.  When your parents pass away and you inherit the house, the house receives a step-up in basis to the fair market value of the house as of the date of death. This means that when you inherit the house, your cost basis will be $300,000 and not the $100,000 that they paid for it. Therefore, if you sell the house the next day for $300,000, you receive that money 100% tax-free due to the step-up in basis.

Appreciation After Date of Death

Let’s build on the example above.  There are additional tax considerations if you inherit a house and continue to hold it as an investment and then sell it at a later date.  While you receive the step-up in basis as of the date of death, the appreciation that occurs on that asset between the date of death and when you sell it is going to be taxable to you.

Example: Your parents passed away June 2019 and at that time their house is worth $300,000. The house receives the step-up in basis to $300,000. However, lets say this time you rent the house or don’t sell it until September 2020. When you sell the house in September 2020 for $350,000, you will receive the $300,000 tax-free due to the step-up in basis, but you’ll have to pay capital gains tax on the $50,000 gain that occurred between date of death and when you sold house.

Caution: Gifting The House To The Kids

In an effort to protect the house from the risk of a long-term event, sometimes individuals will gift their house to their kids while they are still alive. Some see this as a way to remove themselves from the ownership of their house to start the five-year Medicaid look back period, however, there is a tax disaster waiting for you with the strategy.

When you gift an asset to someone, they inherit your cost basis in that asset, so when you pass away, that asset does not receive a step-up in basis because you don’t own it and it’s not part of your estate.

Example:  Your parents change the deed on the house to you and your siblings while they’re still alive to protect assets from a possible nursing home event.  They bought the house 30 years ago for $100,000, and when they pass away it’s worth $300,000. Since they gifted the assets to the kids while they were still alive, the house does not receive a step-up in basis when they pass away, and the cost basis on the house when the kids sell it is $100,000; in other words, the kids will have to pay tax on the $200,000 gain in the property.  Based on the long-term capital gains rates and possible state income tax, when the children sell the house, they may have a tax bill of $44,000 or more which could have been completely avoided with better advanced planning.

How To Avoid Paying Capital Gains Tax On Inherited Property

There are ways to both protect the house from a long-term event and still receive the step-up in basis when the current owners pass away. This process involves setting up an irrevocable trust to own the house which then protects the house from a long-term event as long as it’s held in the trust for at least five years.

Now, we do have to get technical for a second. When an asset is owned by an irrevocable trust, it is technically removed from your estate. Most assets that are not included in your estate when you pass do not receive a step-up in basis; however, if the estate attorney that drafts the trust document puts the correct language within the trust, it allows you to protect the assets from a long-term event and receive a step-up in basis when the owners of the house pass away.

For this reason, it’s very important to work with an attorney that is experienced in handling trusts and estates, not a generalist. It only takes a few missing sentences from that document that can make the difference between getting that asset tax free or having a huge tax bill when you go to sell the house.

Establishing this trust can sometimes cost between $3,000 and $6,000. But by paying this amount upfront and doing the advance planning, you could save your heirs 10 times that amount by avoiding a big tax bill when they inherit the house.

Making The House Your Primary

In the case that the house is gifted to the children prior to the parents passing away and the house is not awarded the step-up in basis, there is an advance tax planning strategy if the conditions are right to avoid the big tax bill.  If one of the children would be interested in making their parent’s house their primary residence for two years, then they are then eligible for either the $250,000 or $500,000 capital gains exclusion.

According to current tax law, if the house you live in has been your primary residence for two of the previous five years, when you go to sell the house you are allowed to exclude $250,000 worth of gain for single filers and $500,000 worth of gain for married filing joint.  This advanced tax strategy is more easily executed when there is a single heir and can get a little more complex when there are multiple heirs.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

How Much Should I Budget For Health Care Costs In Retirement?

The number is higher than you think.  When you total up the deductibles and premiums for Medicare part A, B, and D, that alone can cost a married couple $7,000 per year.  We look at that figure as the baseline number. That $7,000 does not account for the additional costs associated with co-insurance, co-pays, dental costs, or Medigap insurance premiums which can quickly increase the overall cost to $10,000+ per year.

Tough to believe? Allow me to walk you through the numbers for a married couple.

Medicare Part A:  $2,632 Per Year

Part A covers inpatient hospital stays, skilled nursing facility stays, some home health visits, and hospice care.  While Part A does not have an annual premium, it does have an annual deductible for each spouse.  That deductible for 2017 is $1,316 per person.

Medicare Part B:  $3,582

Part B covers physician visits, outpatient services, preventive services, and some home health visits.  The standard monthly premium is $134 per person but it could be higher depending on your income level in retirement.   There is also a deductible of $183 per year for each spouse.

Medicare Part D:  $816

Part D covers outpatient prescription drugs through private plans that contract with Medicare.  Enrollment in Part D is voluntary. The benefit helps pay for enrollees’ drug costs after a deductible is met (where applicable), and offers catastrophic coverage for very high drug costs.  Part D coverage is actually provided by private health insurance companies.   The premium varies based on your income and the types of prescriptions that you are taking.  The national average in 2017 for Part D premiums is $34 per person.

If you total up just these three items, you reach $7,030 in premiums and deductibles for the year.  Then you start adding in dental cost, Medigap insurance premiums, co-insurance for Medicare benefits, and it quickly gets a married couple over that $10,000 threshold in health and dental cost each year. Medicare published a report that in 2011, Medicare beneficiaries spent $5,368 out of their own pockets for health care spending, on average.  See the table below.

Start Planning Now

Fidelity Investments published a study that found that the average 65 year old will pay $240,000 in out-of-pocket costs for health care during retirement, not including potential long-term-care costs.   While that seems like an extreme number, just take the $10,000 that we used above, multiply that by 20 year in retirement, and you get to $200,000 without taking into consideration inflation and other important variable that will add to the overall cost.

Bottom line, you have to make sure you are budgeting for these expenses in retirement.  While most individuals focus on paying off the mortgage prior to retirement, very few are aware that the cost of health care in retirement may be equal to or greater than your mortgage payment.  When we are create retirement projections for clients we typically included $10,000 to $15,000 in annual expenses to cover health care cost for a married couple and $5,000 – $7,500 for an individual.

About Michael……...

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Social Security Filing Strategies

Making the right decision of when to turn on your social security benefit is critical. The wrong decision could cost you tens of thousands of dollars over the long run.  Given all the variables surrounding this decision, what might be the right decision for one person may be the wrong decision for another. This article will cover some of the key factors to consider:

Normal Retirement Age

First, you have to determine your "Normal Retirement Age" (NRA). This is listed on your social security statement in the "Your Estimated Benefits" section. If you were born between 1955 – 1960, your NRA is between age 66 – 67. If you were born 1960 or later, your NRA is age 67. You can obtain a copy of your statement via the social security website.

Before Normal Retirement Age

You have the option to turn on social security prior to your normal retirement age. The earliest you can turn on social security is age 62. However, they reduce your social security benefit by approximately 7% per year for each year prior to your normal retirement age. See the chart below from USA Today which illustrates an individual with a normal retirement age of 66. If they turn on their social security benefit at age 62, they would only receive 75% of their full benefit. This reduction is a permanent reduction. It does not increase at a later date, outside of the small cost of living increases.

taking social security early

The big questions is: “If I start taking it age 62, at what age is the breakeven point?” Remember, if I turn on social security at 62 and my normal retirement age is 66, I have received 4 years of payments from social security. So at what age would I be kicking myself wishing that I had waited until normal retirement age to turn on my benefit. There are a few different ways to calculate this accounting for taxes, the rates of return on other retirement assets, inflations, etc. but in general it’s sometime between the ages of 78 and 82.

Since the breakeven point may be in your early 80’s, depending on your health, and the longevity in your family history, it may or may not make sense to turn on your benefit early. If we have a client that is in ok health but not great health and both of their parents passed way prior to age 85, then it may make sense to for them to turn on their social security benefit early. We also have clients that have pensions and turning on their social security benefit early makes the different between retiring now or have to work for 5+ more years. As long as the long-term projections work out ok, we may recommend that they turn on their social security benefit early so they can retire sooner.

Are You Still Working?

This is a critical question for anyone that is considering turning on their social security benefits early. Why? If you turn on your social security benefit prior to reaching normal retirement age, there is an “earned income” penalty if you earn over the threshold set by the IRS for that year. See the table listed below:

In 2016, for every $2 that you earned over the $15,720 threshold, your social security was reduced by $1. For example, let’s say I’m entitled to $1,000 per month ($12,000 per year) from social security at age 62 and in 2016 I had $25,000 in W2 income. That is $9,280 over the $15,720 threshold for 2016 so they would reduce my annual benefit by $4,640. Not only did I reduce my social security benefit permanently by taking my social security benefit prior to normal retirement age but now my $12,000 in annual social security payments they are going to reduce that by another $4,640 due to the earned income penalty. Ouch!!!

Once you reach your normal retirement age, this earned income penalty no longer applies and you can make as much as you want and they will not reduce your social security benefit.

Because of this, the general rule of thumb is if you are still working and your income is above the IRS earned income threshold for the year, you should hold off on turning on your social security benefits until you either reach your normal retirement age or your income drops below the threshold.

Should I Delay May Benefit Past Normal Retirement Age

As was illustrated in first table, if you delay your social security benefit past your normal retirement age, your benefit will increase by approximately 8% per year until you reach age 70. At age 70, your social security benefit is capped and you should elect to turn on your benefits.

So when does it make sense to wait? The most common situation is the one where you plan to continue working past your normal retirement age. It’s becoming more common that people are working until age 70. Not because they necessarily have too but because they want something to keep them busy and to keep their mind fresh. If you have enough income from employment to cover you expenses, in many cases, is does make sense to wait. Based on the current formula, your social security benefit will increase by 8% per year for each year you delay your benefit past normal retirement age. It’s almost like having an investment that is guaranteed to go up by 8% per year which does not exist.

Also, for high-income earners, a majority of their social security benefit will be taxable income. Why would you want to add more income to the picture during your highest tax years? It may very well make sense to delay the benefit and allow the social security benefit to increase.

Death Benefit

The social security death benefit also comes into play as well when trying to determine which strategy is the right one for you. For a married couple, when their spouse passes away they do not continue to receive both benefits. Instead, when the first spouse passes away, the surviving spouse will receive the “higher of the two” social security benefits for the rest of their life. Here is an example:

Spouse 1 SS Benefit: $2,000

Spouse 2 SS Benefit: $1,000

If Spouse 1 passes away first, Spouse 2 would bump up to the $2,000 monthly benefit and their $1,000 monthly benefit would end. Now let’s switch that around, let’s say Spouse 2 passes away first, Spouse 1 will continue to receive their $2,000 per month and the $1,000 benefit will end.

If social security is a large percentage of the income picture for a married couple, losing one of the social security payments could be detrimental to the surviving spouse. Due to this situation, it may make sense to have the spouse with the higher benefit delay receiving social security past normal retirement to further increase their permanent monthly benefit which in turn increases the death benefit for the surviving spouse.

Spousal Benefit

The “spousal benefit” can be a powerful filing strategy. If you are married, you have the option of turning on your benefit based on your earnings history or you are entitled to half of your spouse’s benefit, whichever benefit is higher. This situation is common when one spouse has a much higher income than the other spouse.

Here is an important note. To be eligible for the spousal benefit, you personally must have earned 40 social security “credits”. You receive 1 credit for each calendar quarter that you earn a specific amount. In 2016, the figure was $1,260. You can earn up to 4 credits each calendar year.

Another important note, under the new rules, you cannot elect your spousal benefit until your spouse has started receiving social security payments.

Here is where the timing of the social security benefits come into play. You can turn on your spousal benefit as early as 62 but similar to the benefit based on your own earnings history it will be reduce by approximately 7% per year for each year you start the benefit prior to normal retirement age. At your normal retirement age, you are entitled to receive your full spousal benefit.

What happens if you delay your spousal benefit past normal retirement age? Here is where the benefit calculation deviates from the norm. Typically when you delay benefits, you receive that 8% annual increase in the benefits up until age 70. The spousal benefit is based exclusively on the benefit amount due to your spouse at their normal retirement age. Even if your spouse delays their social security benefit past their normal retirement age, it does not increase the 50% spousal benefit.

Here is the strategy. If it’s determine that the spousal benefit will be elected as part of a married couple’s filing strategy, since delaying the start date of the benefits past normal retirement age will only increase the social security benefit for the higher income earning spouse and not the spousal benefit, in many cases, it does not make sense to delay the start date of the benefits past normal retirement age.

Divorce

For divorced couples, if you were married for at least 10 years, you can still elect the spousal benefit even though you are no longer married. But you must wait until your ex-spouse begins receiving their benefits before you can elect the spousal benefit.

Also, if you were married for at least 10 years, you are also entitled to the death benefit as their ex-spouse. When your ex-spouse passes away, you can notify the social security office, elect the death benefit, and you will receive their full social security benefit amount for the rest of your life instead of just 50% of their benefit resulting from the “spousal benefit” calculation.

Whether or not your ex-spouse remarries has no impact on your ability to elect the spousal benefit or death benefit based on their earnings history.

Consult A Financial Planner

Given all of the variables in the mix and the importance of this decision, we strongly recommend that you consult with a Certified Financial Planner® before making your social security benefit elections. While the interaction with a fee-based CFP® may cost you a few hundred dollars, making the wrong decision regarding your social security benefits could cost you thousands of dollars over your lifetime. You can also download a Financial Planner Budget Worksheet to give you that extra help when sorting out your finances and monthly budgeting.

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Can I Negotiate A Car Lease Buyout?

The short answer is "yes", but the approach that you take will most likely determine whether or not you are successful at purchasing your vehicle for a lower price than the amount listed in the lease agreement. When you lease a car, the lease agreement typically includes an amount that you can purchase the car for at the end of the lease. That amount is essentially a guess by the bank that is providing the financing for the lease as to what the future value of your vehicle will be at the end of the lease.

Lease Buyout Calculation

Step number one in the negotiation process is to determine what your vehicle is worth. Did the bank guess right or wrong? If the purchase amount in your lease agreement is $25,000 but you find that the vehicle, based on current market conditions, is only worth $18,000, you probably have room to negotiate the purchase price of your vehicle but you have to do your homework. Compare your vehicle's purchase price to the retail value of local auto dealers. If you can show the bank that there is a local auto dealer trying to sell the exact make and model of your leased car with similar mileage, the bank will be more likely to accept a lower purchase price realizing that they guessed wrong.

Deal Directly With The Bank

You may have noticed that I continue to reference the "bank" in the negotiation process and not the "dealer". This is intentional. Some leasing banks allow dealers to increase the cost of the lease buyout to make a profit. Dealers can also charge document fees, which are taxable in most states. It may also be advantageous to line up your own financing for the lease purchase amount before entering into the negotiation process. If the dealer arranges the financing for you, it can sometimes increase your interest rate to make more money on the purchase. By dealing directly with the leasing bank you can cut out these additional costs.

You Make The Offering Price

Start by making an offer to the leasing bank based on your market research. Also make sure you contact the leasing bank well in advance of the lease "turn-in date". The bank may not be able to provide you with an immediate response to your offer so give yourself plenty of time for the negotiation process to work.

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog. I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.

Can I Use My 401K or IRA To Buy A House?

The most difficult part of buying a house is coming up with the down payment. This leads to the question, "Can I access cash in my retirement accounts to help toward the down payment on my house?". The short answer is in most cases, "Yes". The next important questions is "Is it a good idea to take a withdrawal from my retirement account for the down payment given all of the taxes and penalties that I would have to pay?" This article aims to answer both of those questions and provide you with withdrawal strategies to help you avoid big tax consequences and early withdrawal penalties.

401(k) Withdrawal Options Are Not The Same As IRA's

First you have to acknowledge that different types of retirement accounts have different withdrawal options available. The withdrawal options for a down payment on a house from a 401(k) plan are not the same a the withdrawal options from a Traditional IRA. There is also a difference between Traditional IRA's and Roth IRA's.

401(k) Withdrawal Options

There may be loan or withdrawal options available through your employer sponsored retirement plan. I specifically say "may" because each company's retirement plan is different. You may have all or none of the options available to you that will be presented in this article. It all depends on how your company's 401(k) plan is designed. You can obtain information on your withdrawal options from the plan's Summary Plan Description also referred to as the "SPD".

Taking a 401(k) loan.............

The first option is a 401(k) loan.  Some plans allow you to borrow 50% of your vested balance in the plan up to a maximum of $50,000 in a 12 month period. Taking a loan from your 401(k) does not trigger a taxable event and you are not hit with the 10% early withdrawal penalty for being under the age of 59.5.  401(k) loans, like other loans, change interest but you are paying that interest to your own account so it is essentially an interest free loan. Typically 401(k) loans have a maximum duration of 5 years but if the loan is being used toward the purchase of a primary residence, the duration of the loan amortization schedule can be extended beyond 5 years if the plan's loan specifications allow this feature.

Note of caution, when you take a 401(k) loan, loan payments begin immediately after the loan check is received. As a result, your take home pay will be reduced by the amount of the loan payments. Make sure you are able to afford both the 401(k) loan payment and the new mortgage payment before considering this option.

The other withdrawal option within a 401(k) plan, if the plan allows, is a hardship distribution. As financial planners, we strongly recommend against hardship distributions for purposes of accumulating the cash needed for a down payment on your new house. Even though a hardship distribution gives you access to your 401(k) balance while you are still working, you will get hit with taxes and penalties on the amount withdrawn from the plan. Unlike IRA's which waive the 10% early withdrawal penalty for first time homebuyers, this exception is not available in 401(k) plans. When you total up the tax bill and the 10% early withdrawal penalty, the cost of this withdrawal option far outweighs the benefits.

If You Have A Roth IRA.......Read This.....

Roth IRA's can be one of the most advantageous retirement accounts to access for the down payment on a new house. With Roth IRA's, you make after tax contributions to the account, and as long as the account has been in existence for 5 years and you are over the age of 59� all of the earnings are withdrawn from the account 100% tax free. If you withdraw the investment earnings out of the Roth IRA before meeting this criteria, the earnings are taxed as ordinary income and a 10% early withdrawal penalty is assessed on the earnings portion of the account.

What very few people know is if you are under the age of 59� you have the option to withdraw just your after-tax contributions and leave the earnings in your Roth IRA. By doing so, you are able to access cash without taxation or penalty and the earnings portion of your Roth IRA will continue to grow and can be distributed tax free in retirement.

The $10,000 Exclusion From Traditional IRA's.......

Typically if you withdraw money out of your Traditional IRA prior to age 59� you have to pay ordinary income tax and a 10% early withdrawal penalty on the distribution. There are a few exceptions and one of them is the "first time homebuyer" exception. If you are purchasing your first house, you are allowed to withdrawal up to $10,000 from your Traditional IRA and avoid the 10% early withdrawal penalty. You will still have to pay ordinary income tax on the withdrawal but you will avoid the early withdrawal penalty. The $10,000 limit is an individual limit so if you and your spouse both have a traditional IRA, you could potentially withdrawal up to $20,000 penalty free.

Helping your child to buy a house..........

Here is a little known fact. You do not have to be the homebuyer. You can qualify for the early withdrawal exemption if you are helping your spouse, child, grandchild, or parent to buy their first house.

Be careful of the timing rules..........

There is a very important timing rule associated with this exception. The closing must take place within 120 day of the date that the withdrawal is taken from the IRA. If the closing happens after that 120 day window, the full 10% early withdrawal penalty will be assessed. There is also a special rollover rule for the first time homebuyer exemption which provides you with additional time to undo the withdrawal if need be. Typically with IRA's you are only allowed 60 days to put the money back into the IRA to avoid taxation and penalty on the IRA withdrawal. This is called a "60 Day Rollover". However, if you can prove that the money was distributed from the IRA with the intent to be used for a first time home purchase but a delay or cancellation of the closing brought you beyond the 60 day rollover window, the IRS provides first time homebuyers with a 120 window to complete the rollover to avoid tax and penalties on the withdrawal.

Don't Forget About The 60 Day Rollover Option

Another IRA withdrawal strategy that is used as a “bridge solution” is a “60 Day Rollover”. The 60 Day Rollover option is available to anyone with an IRA that has not completed a 60 day rollover within the past 12 months. If you are under the age of 59.5 and take a withdrawal from your IRA but you put the money back into the IRA within 60 days, it’s like the withdrawal never happened. We call it a “bridge solution” because you have to have the cash to put the money back into your IRA within 60 days to avoid the taxes and penalty. We frequently see this solution used when a client is simultaneously buying and selling a house. It’s often the intent that the seller plans to use the proceeds from the sale of their current house for the down payment on their new house. Unfortunately due to the complexity of the closing process, sometimes the closing on the new house will happen prior to the closing on the current house. This puts the homeowner in a cash strapped position because they don’t have the cash to close on the new house.

As long as the closing date on the house that you are selling happens within the 60 day window, you would be able to take a withdrawal from your IRA, use the cash from the IRA withdrawal for the closing on their new house, and then return the money to your IRA within the 60 day period from the house you sold. Unlike the “first time homebuyer” exemption which carries a $10,000 limit, the 60 day rollover does not have a dollar limit.

About Michael.........

Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.