How Does A Simple IRA Plan Work?

Not every company with employees should have a 401(k) plan. In many cases, a Simple IRA plan may be the best fit for a small business. These plans carry the following benefits

• No TPA fees

• Easy to setup & operate

• Employee attraction and retention tool

• Pre-tax contributions for the owners to lower their tax liability

Your company

To be eligible to sponsor a Simple IRA, your company must have less than 100 employees. The contribution limits to these plans are about half that of a 401(k) plan but it still may be the right fit for you company. Here are some of the most common statements that we hear from the owners of the business that would lead you to considering a Simple IRA plan over a 401(k) plan:

"I want to put a retirement plans in place for my employees that has very low fees and is easy to operate."

"We are a start-up, we don't have a lot of money to contribute to the plan as the owners, but we want to put a plan in place to attract and retain employees."

"I plan on contributing $15,000 per year to the plan, even if I sponsored a plan that allowed me to contribute more I wouldn't because I'm socking all of the profits back into the business"

"I have a SEP IRA now but I just hired my first employee. I need to setup a different type of plan since SEP IRA's are 100% employer funded"

Establishment Deadline

The deadline to establish a Simple IRA plan is October 1st. Once you have cross over that date, you would have to wait until the following calendar year to set the plan.

Eligibility

The eligibility requirements for a Simple IRA are different than a SEP IRA or 401(k) plans. Unlike these other plan "1 Year of Service" = $5,000 of compensation earned in a calendar year. If you want to only cover "full-time" employees with your retirement plan, you may need to consider a 401(k) plan which has the 1 year and 1000 hours requirement to obtain a year of service. The most restrictive "wait time" that you can put into place is 2 years. Meaning an employee must obtain 2 years of service before they are eligible to start contributing to the plan. You can also be more lenient that 2 years, such as immediate entry or a 1-year wait, but 2 years is the most restrictive it can be.

Types of Contributions

Like a 401(k) plan, Simple IRA have both employee deferral contributions and employer contributions.

Employee Deferrals

Eligible employees are allowed to make pre-tax contributions to their Simple IRA accounts. The contribution limits are less than a traditional 401(k). Below is a tale comparing the 2021 contribution limits of a Simple IRA vs a 401(k) Plan:

There are not Roth deferrals allows in Simple IRA plans.

Employer Contributions

Unlike other employer sponsored retirement plans, employer contributions are mandatory each year to a Simple IRA plan. The company must choose between two pre-set employer contribution formulas:

• 2% Non-elective

• 3$ Matching contribution

With the 2% non-elective contribution, the company must contribute 2% of each eligible employee’s compensation to the plan whether they contribute to the plan or not.

For the 3% matching contribution, it’s a dollar for dollar match up to 3% of compensation that they employee contributes to the plan. The match formula is more popular than the 2% non-elective contribution because the company only must contribute if the employee contributes.

Special 1% Rule

With the employer matching contribution there is also a special rule. In 2 out of any 5 consecutive years, the company can lower the employer match to as low as 1% of pay. We will often see start-up company's take advantage of this rule by putting a 1% employer match in place for the first 2 years of the plan to minimize costs and then they are committed to making the 3% match for years 3, 4, and 5.

100% Vesting

All employer contributions to Simple IRA plans are 100% vested. The company is not allowed to attach a "vesting schedule" to the contributions.

Important Compliance Requirements

Make sure you have a 5304 Simple Form in your files for each year you sponsor the Simple IRA plan. If you are audited by the IRS or DOL, they will ask for these forms. You need to distribute this form to all of your employee each year between Nov 1st and Dec 1st for the upcoming plan year. The documents notifies your employees that:

• A retirement plan exists

• Plan eligibility requirement

• Employer contribution formula

• Who they submit their deferral elections to within the company

If you do not have this form on file, the IRS will assume that you have immediate eligibility for your Simple IRA plan, meaning that all of your employees are due employer contributions since day one of employment. Even employee that used to work for you and have since terminated employment. It’s an ugly situation.

Make sure the company is timely when submitting the employee deferrals to the Simple IRA plan. Since you are withholding money from employees pay for the salary deferrals the IRS want you to send that money to their Simple IRA accounts “as soon as administratively feasible”. The suggested time phrase is within a week of the deduction in payroll. But you must be consistent with the timing of your remittances to your Simple IRA plan. If you typically submit contributions to your Simple IRA provider 5 days after a payroll run but one week you randomly submit it 2 days after the payroll run, 2 days just became the rule and all of the other deferral remittances are “late”. The company will be assessed penalties for all of the late deferral remittances. So be consistent.

Cannot Terminate Mid-Year

Unlike other retirement plans, you cannot terminate a Simple IRA plan mid-year. Simple IRA plan termination are most common when a company started with a Simple IRA, has grown in employee head count, and now wishes to put a 401(k) plan in place. You must wait until after December 31st to terminate the Simple IRA plan and implement the new 401(k) plan.

Special 2 Year Rule

If you replace your Simple IRA with a 401(k) plan, the balances in the Simple IRA can usually be rolled over into the new 401(k) if the employee elects to do so. However, be very careful of the special Simple IRA 2 Year Distribution Rule. If you process any type of distribution from a Simple IRA, within a two-year period of the employee depositing their first dollar to the account, and the employee is under 59½, they are hit with a 25% IRS penalty. THIS ALSO APPLIES TO DIRECT ROLLOVERS. Normally when you process a direct rollover from one retirement plan to another, no taxes or penalties are assessed. That is not the case in Simple IRA plan so be care of this rule. If you decide to switch from a Simple IRA to a 401(k), make sure you run a list of all the employees that maintain a balance in the Simple IRA plan to determine which employees are subject to the 2-year withdrawal restriction.

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.

Watch These Two Market Indicators

While a roaring economy typically rewards equity investors, the GDP growth rate in the U.S. has continued to grow at that same 2.2% pace that we have seen since the recovery began in March 2009. When you compare that to the GDP growth rates of past economic expansions, some may classify the current growth rate as “sub par”. As in the tale of the tortoise and the hare, sometimes slow and steady wins the race.

The number one questions on investor’s minds: “It’s been a great rally but are we close to the end?” Referencing the chart below, if you look at the length of the current economic expansion, going back to 1900 we are now witnessing the 3rd longest economic expansion on record which is making investors nervous because as we all know that markets work in cycles.

However, if you ignore the “length” of the rally for a moment and look at the “magnitude” of the rally it would seem that total GDP growth of the current economic expansion has been relatively tame compared to some of the economic recoveries in the past. See the chart below. The chart shows evidence that there have been economic rallies in the past that were shorter in duration but greater in magnitude. This may indicate that we still have further to go in the current economic expansion.

What causes big rallies to end?

Looking back at strong economic rallies in the past, the rallies did not die of old age but rather there was an event that triggered the next recession. So we have to be able identify trends within the economic data that would suggest that the economic expansion has ended and it will lead to the next recession.

Watch these two indicators

Two of the main indicators that we monitor to determine where we are in the current economic cycle are the Leading Indicators Index and the Yield Curve. History rarely repeats itself but it does rhyme. Look at the chart of the leading indicators index below. The leading indicators index is comprised of multiple economic indicators that are considered “forward looking”, like housing permits. If there are a lot of housing permits being issues, then demand for housing must be strong, and a strong housing market could lead to further economic growth. Look specifically at 2006. The leading indicators went negative in 2006, over a year before the stock market peaked in 2007. This indicator was telling us there was a problem before a majority of investors realized that we were on the doorstep of the recession.

Let’s look at the second key indicator, the yield curve. You will hear a lot about the “slope of the yield curve” in the media. In a healthy economy, long term interest rates are typically higher than short term rates which results in a “positively slopped” yield curve. In other words, when you go to the bank and you have the choice of buying a 2 year CD or a 10 year CD, you would expect to receive a higher interest rate on the 10 year CD because they are locking up your money for 10 years instead of 2.

There are periods of time where the interest rate on a 10 year government bond will drop below the interest rate on a 2 year government bond which is considered an “inverted yield curve”. Why does this happen and why would investors by that 10 year bond that is yielding less than the 2 year bond? This happens because bond investors are predicting an economic slowdown in the foreseeable future. They want to lock in the current 10 year interest rate knowing that if the economy goes into a recession that the Fed may begin to lower the Fed Funds Rate which has a more rapid impact on short term rates. It’s a bet that the 2 year bond rate will drop below the 10 year bond rate within the next few years.

If you look at the historical chart of the yield curve above, the yield curve inverted prior to the recession in the early 2000’s and prior to the 2008 recession.

Looking at where we sit today, within the last 6 months the leading indicators index has not only been positive but it’s accelerating and the yield curve is still positively sloped. While we realize that there is not a single indicator that accurately predicts the end of a market cycle, these particular economic indicators have historically been helpful in predicting danger ahead.

There will always be uncertainty in the world. Currently it has taken the form of U.S, politics, tax reforms, geopolitical events, and global monetary policy but it would seem that based on the hard economic data here in the U.S. that our economic expansion that began in March 2009 may still have further to go.

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 Does A SEP IRA Work?

 What is a SEP?

SEP stands for “Simplified Employee Pension”.  The SEP IRA is one of the most common employer sponsored retirement plans used by sole proprietors and small businesses.

Special Establishment Deadline

SEP are one of the few retirement plans that can be established after December 31st which make them a powerful tax tool.  For example, it’s March, you are meeting with your accountant and they deliver the bad news that you have a big tax bill that is due.  You can setup the SEP IRA any time to your tax filing date PLUS extension, fund it, and capture the tax deduction.

Easy to Setup & Low Plan Fees

The other advantage of SEP IRA’s is they are easy to setup and you do not have a third-party administrator to run the plan, so the costs are a lot lower than a traditional 401(k) plans.  These plans can typically be setup with 24 hours.

Contributions limits

SEP IRA contributions are expressed as a percentage of compensation.  The maximum contribution is either 20% of the owners “net earned income” or 25% of the owners W2 wages.  It all depends on how your business is incorporated.  You have the option to contribution any amount less than the maximum contribution.

100% Employer Funded

SEP IRA plans are 100% employer funded meaning there is no employee deferral piece.  Which makes them expense plans to sponsor for a company that eligible employees because the employer contribution is uniform for all employees.  Meaning if the owner contributes 20% of their compensation to the plan for themselves they must also make a contribution equal to 20% of compensation for each eligible employee.  Typically, once employees begin becoming eligible for the plan, a company will terminate the SEP IRA and replace it with either a Simple IRA or 401(k) plans.

Employee Eligibility Requirements

An employee earns a “year of service” for each calendar year that they earn $500 in compensation.  You can see how easy it is to earn a “year of service” in these types of plans.  This is where a lot of companies make an error because they only look at their “full time employees” as eligible.  The good news for business owners is you can keep employees out of the plan for 3 years and then they become eligible in the 4th year of employment.  For example, I am a sole proprietor and I hire my first employee, if my plan document is written correctly, I can keep that employee out of the SEP IRA for 3 years and then they will not be eligible for the employer contribution until the 4th year of employment.

Read This……..Very Important…..

There is a plan document called a 5305 SEP form that is required to sponsor a SEP IRA plan.  This form can be printed off the IRS website or is sometimes provide by the investment platform for your plan.   Remember, SEP IRA plans are “self-administered” meaning that you as the business owner are responsible for keeping the plan in compliance.  Do cannot always rely on your investment advisor or accountant to help you with your SEP IRA plan. You should have a 5305 SEP for in your employer files for each year you have sponsored the plan.   This form does not get filed with the IRS or DOL but rather is just kept in your employer files in the case of an audit. You are required to give this form to all employees of the company each year.  It’s a way of notifying your employees that the plan exists and it lists the eligibility requirements.

Compliance Issues

The main compliance issues to watch out for with these plan is not having that 5305 SEP Form for each year the plan has been sponsored, not accurately identifying eligible employees, and miscalculating your “net earned income” for the max SEP IRA contribution. 

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 Do Single(k) Plans Work?

What is a Single(k) Plan?

A Single(k) plan is an employer sponsored retirement plan for owner only entities, meaning you have no full-time employees. These owner only entities get the benefits of having a full fledge 401(k) plan without the large administrative costs associated with traditional 401(k) plans.

What is the definition of a “full-time” employee?

Often times a small company will have some part-time staff. It does not matter whether you consider them “part-time”, the definition of full-time employee is defined by the IRS as working 1000 hours in a 12 month period. If you have a “full-time” employee you would not be eligible to sponsor a Single(k) plan.

Types of Contributions

There are two types of contributions to these plans. Employee deferral contributions and employer profit sharing contributions. The employee deferral piece works like a 401(k) plan. If you are under the age of 50 you can contribute $19,500, in 2021, in employee deferrals. If you are 50 or older, you get the $6,500 catch up contribution so you can contribute $24,000 in employee deferrals.

The reason why these plans are a little different than other employer sponsored plans is the employee deferral piece allows you to put 100% of your compensation into these plans up to those dollar thresholds.

In addition to the employee deferrals, you can also contribute 20% of your net earned income in the form of a profit-sharing contribution. For example, if you make $100,000 in net earned income from self-employment and you are over 50, you could contribute $24,000 in employee deferrals and then you could contribute an additional $20,000 in form of a profit sharing contribution. Making your total pre-tax contribution $44,000.

Establishment Deadline

You have to establish these plans by December 31st. In most cases that plan does not have to be funded by 12/31 but you have to have the plan document signed by 12/31. You normally have until tax filing deadline plus extension to fund the plan.

Loans & Roth Deferrals

Single(k) plans provide all of the benefits to the owner of a full 401(k) plan at a fraction of the cost. You can set up the plan to allow 401(k) loan and Roth deferral contributions.

SEP IRA vs Single(k) Plans

A lot of small business owners find themselves in a position where they are trying to decide between setting up a SEP IRA or a Single(k) plan. One of the big factors, that is often times the deciding factor, is how much the owner intends to contribute to the plan. The SEP IRA limits the business owner to just the 20% of net earned income. Whereas the Single(k) plan allows the 20% of net earned income plus the employee deferral contribution amount. However, if 20% of your net earned income would satisfy your target amount then the SEP IRA may be the right choice.

Advanced Strategy Using A Single(k) Plan

Here is a great tax strategy if you have one spouse that is the primary breadwinner bringing in most of the income and the other has self-employment income for a side business. If the spouse with the self-employment income is over the age of 50 and makes $20,000 in net earned income, they could set up a Single(k) Plan and defer the full $20,000 into their Single(k) plan as employee deferrals. If they had a SEP IRA, the max contribution would have been $4,000.

A huge tax savings for a married couple that is looking to lower their tax liability.

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, pleas feel free to join in on the discussion or contact me directly.

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.

Required Minimum Distribution Tax Strategies

If you are turning age 72 this year, this article is for you.  You will most likely have to start taking required minimum distributions from your retirement accounts.  This article will outline:

• Deadlines to take your RMD

• Tax implications

• Strategies to reduce your tax bill

How is my RMD calculated?

The IRS has a tax table that determines the amount that you have to take out of your retirement accounts each year. To determine your RMD amount you will need to obtain the December 31st balance in your retirement accounts, find your age on the IRS RMD tax table, and divide your 12/31 balance by the number listed next to your age in the tax table.

Exceptions to the RMD requirement........

There are two exceptions. First, Roth IRA’s do not require RMD’s.  Second, if you are still working, you maintain a balance in your current employer’s retirement plan, and you are not a 5%+ owner of the company, you do not need to take an RMD from that particular retirement account until you terminate employment with the company.  Which leads us to the first tax strategy.  If you are age 72 or older and you are still working, you can typically rollover your traditional IRA’s and former employer 401(k)/403(b) accounts into your current employers retirement plan.  By doing so, you avoid the requirement to take RMD’s from those retirement accounts outside of your current employers retirement plan and you avoid having to pay taxes on those required minimum distributions.  If you are 5%+ owner of the company, you are out of luck. The IRS will still require you to take the RMD from your retirement account even though you are still “employed” by the company.

Deadlines

In the year that you turn 72, if you do not meet one of the exceptions listed above, you will have a very important decision to make.  You have the option to take the RMD by 12/31 of that year or wait until the beginning of the following tax year.  For your first RMD, the deadline to take the RMD is April 1st of the year following the year that you turn age 72.   For example, if you turn 72 on June 2017, you will not be required to take your first RMD until April 1, 2018.  If you worked full time from January 2017 – June 2017, it may make sense for you to delay your first RMD until January 2018 because your income will most likely be higher in 2017 because you worked for half of the year.  When you take a RMD, like any other distribution from a pre-tax retirement account, it increases the amount of your taxable income for the year.  From a pure tax standpoint it usually makes snese to realize income from retirement accounts in years that you are in a lower tax bracket.

SPECIAL NOTE:  If you decided to delay your first RMD until after December 31st, you will be required to take two RMD’s in that year.  One prior to April 1st and the second before Decemeber 31st.  The April 1st rule only applies to your first RMD.  You should consult with your accountant to determine the best RMD strategy given your personal income tax situation.  For all tax years following the year that you turn age 72, the RMD deadline is December 31st.

VERY IMPORTANT:  Do not miss your RMD deadline.  The IRS hits you with a lovely 50% excise tax if you fail to take your RMD by the deadline.  If you were due a $4,000 RMD and you miss the deadline, the IRS is going to levy a $2,000 excise tax against you.

Contributions to charity to avoid taxes

 Another helpful tax strategy, if you make contributions to a charity, a church, or not-for-profit organization, you have the option with IRA’s to direct all or a portion of your RMD directly to these organization. In doing so, you satisfy your RMD but avoid having to pay income tax on the distribution from the IRA.  The number one rule here, the distribution must go directly from your IRA account to the not-for-profit organization.    At no point during this transaction can the owner of the IRA take possession of cash from the RMD otherwise the full amount will be taxable to the owner of the IRA.  Typically the custodian of your IRA will have to issue and mail a third party check directly to the not-for-profit organization. 

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.

The #1 Question To Ask Yourself Before Selling A Stock

When is the right time to sell an investment? It's a tough decision that individuals have a difficult time making but it's one of the most important decisions that you will have to make as an investor. Often time the decision to "buy" an investment is much easier.  You gather information on a given investment, look at the trends in the market acting on that investment, assess the risk versus reward trade off, and you put your strategy to work. Deciding to sell has a lot more emotions involved which frequently causes investors to make the wrong decision.

When do I sell a big winner?

First scenario is "the rocket ship". You purchased a stock and the stock price has gone through the roof. It's made you a ton of money on paper, you proudly boast to your friends and co-workers about the price that you bought it at, and in certain instances it has been a life changing financial event. The mistake investors make here is they get into what we call "the teddy bear syndrome".

Teddy bear syndrome.....

Have you ever tried to take a teddy bear away from a five year old......good luck. As adults, we often fall into the same behavioral pattern with very successful investments. Individuals typically have a strong emotional attachment to their most successful investments. But you will frequently hear many legendary investment managers make comments like: "Investment decisions are not emotional decisions. You have to remove your emotions from the decision-making process." Let's say you bought $10,000 of XYZ stock at $10 per share and five years later it's now selling at $890 per share turning your $10,000 into $890,000. Do you sell some of it, maybe all of it?

Here is the key question........

"If you had that $890,000 in cash in your hand today, would you invest all of it back into XYZ stock at $890 per share?"

Most people would say "No!! That's crazy. I would diversify that $890,000 across a number of holdings and the stock has already gone up so much". Continuing to hold a stock is the same decision as buying a stock. But doing nothing is easier because we feel like we are not making a decision, we are just "continuing to hold". Remember, it's easy to sell a stock that has lost money. It's much more difficult to sell a stock that produced a gain. Of course, this brings up the question of how do you find the right stocks to invest in?

"If I sell the stock, I'll have to pay tax on the gain."

Question: Would you rather pay taxes on a gain or lose money? Usually if you are paying taxes it means that you are making money. If I sold the stock holding in the example above, I would have an $880,000 long term capital gain at a minimum would pay around $132,000 in long term capital gains tax at 15%. This would leave me with $758,000 cash in hand from a $748,000 gain plus $10,000 original investment. What if instead of selling I continue to hold the stock and to no fault of company XYZ the economy goes into a recession? The stock goes from $890 a share to $500 a share. Now my total investment is worth $500,000 instead of $890,000. It's still a good investment because I bought it at $10,000 and it's still worth $500,000 but if I sold it at $500 per share I would still pay tax on the gain, now a smaller amount of gain, and be left with around $425,000. That poor decision cost me $333,000 after tax.

The fallen star

Most investors have been here at one point or another. You purchased a stock that rose in value dramatically but for whatever reason the stock lost all of its early investment gains and your investment is now underwater. Many investors will say “It’s a good long term holding so I’m just going to wait for it to come back.” While we are all familiar with the buy and hold strategy, there is a risk and opportunity cost with this strategy. The risk being that it may never come back to its original value. The opportunity cost is the money invested in that underperforming company could be growing somewhere else instead of just “waiting for it to come back”.

You must ask yourself the same key question that was listed above: “If I had that money in my hand today, would I invest all of it in that stock?” If the answer is “no”, you should probably sell some or all of it. Do not hold a stock solely based on a target share price. I will hear people say, “Well I bought it at $55 per share so I’m going to wait until it at least gets back to that price.” That is not an investment strategy. You must look at the fundamentals of the company, their competitors, global market conditions, company management, the company’s strategy, and their financials to really come up with a price target for the stock.

The inherited gem

It's a common occurrence that individuals will inherit stock from a family member and they know that family member had a strong emotional attachment to the stock because they either work for the company or they never sold a single share during their lifetime. It's easy to feel that selling the stock is in some way selling the memory of that family member. I will often hear comments like: "My dad worked for the company and held that stock for 40 years. He would be rolling in his grave right now if he knew I was thinking about selling his stock." This frequently happens because the generation before us had pension plans to support them in retirement and did not have to sell stock to supplement their income or they came from a generation that was very frugal about spending money. Your needs and circumstances are probably very different from the person that you inherited the stock from so you need to look at that investment holding from your financial standpoint.

I work for the company........

If you work for a publicly traded company then there is a good chance that you own shares of that company in an employee stock purchase plan, retirement plan, options plan, or brokerage account. Since you work for the company it usually means that you have "drank the kool-aide" and believe in the company's mission, vision, and you feel like you have more control over the fate of your investment. Remember, even though you work for that company it's still one company and attaching too much for your net worth to one investment is very risky. It's even more risky for employees because if something negatively impacts the company not only is your employment at risk but so is your total net worth if a large portion of your investment portfolio is tied to the company that you work for. Make sure you periodically calculate a total of all your investment holdings and compare that to the amount invested in your company's stocks to make sure you stay balanced in your overall investment approach.

Ask yourself the easy question.......

While making the decision to buy, sell, or hold an investment is not always an easy one. Finding the right answer may be as easy as asking yourself: "If the amount invested in that stock was in cash and in my hand today, would I invest 100% of it back into that stock holding?"

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.

Tax Deductions For College Savings

Did you know that if you are resident of New York State there are tax deductions waiting for you in the form of a college savings account?  As a resident of NYS you are allowed to take a NYS tax deduction for contributions to a NYS 529 Plan up to $5,000 for a single filer or $10,000 for married filing joint.   These limits are hard dollar thresholds so it does not matter how many kids or grandchildren you have. 

529 Accounts

529 accounts are one of the most tax efficient ways to save for college. You receive a state income tax deduction for contributions and all of the earnings are withdrawn tax free if used for a qualified education expense.  These accounts can only be used for a college degree but they can be used toward an associate’s degree, bachelor’s degree, masters, or doctorate.  You can name whoever you want as a beneficiary including yourself.  More commonly, we see parents set these accounts up for their children or grandparents for the grandchildren.

Can they go to college in any state?

If you setup a NYS 529 account, the beneficiary can go to college anywhere in the United States. It’s not limited to just colleges in New York.  As the owner of the account you can change the beneficiary on the account whenever you choose or close the account at your discretion.

What if they don't go to college?

The question we usually get is “what if they don’t go to college?”  If you have a 529 account for a beneficiary that does not end up going to college you have a few choices.  You can change the beneficiary listed on the account to another child or even yourself.  You can also decide to just liquidate the account and receive a check.  If the account is closed and the balance is not used for a qualified college expense then you as the owner receive your contributions back tax and penalty free.  However, you will pay ordinary income tax and a 10% penalty on just the earnings portion of the account.

What if my child receives a scholarship?

There is a special withdrawal exception for scholarship awards. They do not want to penalize you because the beneficiary did well in high school or is a star athlete so they allow you to make a withdrawal from the 529 account equal to the amount of the scholarship. You receive your contributions tax free, you pay ordinary income tax on the earnings, but you avoid the 10% penalty for not using the account toward a qualified college expense.

Don't make this mistake.............

We often see individuals making the mistake of setting up a 529 account in another state because “their advisor told them to do so”.   You are completely missing out on a good size NYS tax deduction because you only get credit for NYS 529 contributions.  A little-known fact is that you can rollover a 529 with another state into a NYS 529 account and that rollover amount will count toward your $5,000 / $10,000 deduction limit for the year.  If a client has $30,000 in a 529 account outside of NYS we typically advise them to roll it over in $10,000 pieces over a three year period to maximize the $10,000 per year NYS tax deduction. 

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 Loophole: Age 62+ With Kids In High School

There is a little known loophole in the social security system for parents that are age 62 or older with children still in high school or younger.  Since couples are having children later in life this situation is becoming more common and it could equal big dollars for families that are aware of this social security filing strategy.

Here is how it works.  If you are age 62 or older and you have children under that age of 18,  they can collect a social security benefit based on your earnings history equal to half of the parents social security benefit at normal retirement age. This amount could equal as much as $16,122 per year for one child for higher income earners. If you have multiple children the total annual amount paid to your family members could equal between 150% to $180% of your normal retirement benefit which could be in excess of $40,000 per year depending on your earnings history.

There are some key considerations.  First, your children cannot collect on this “family benefit” until you have begun to collect your social security benefit.  You can turn on your social security benefit as early as age 62 but they reduce the monthly amount that you receive if you turn on the benefit prior to your normal retirement age.  However, it may make sense to do so depending on the amount of the family benefit paid and the duration of the benefit. If you wait until normal retirement age, you will receive a slightly higher social security benefit for yourself, but all of the social security dollars that could have been paid to your children is lost.

Second, if you are still working and your earned income exceeds certain thresholds this filing strategy may not be advantageous due to the earned income penalty.  They reduce your social security benefit by $1 for every $2 earned over a given threshold ($16,920 in 2017). Not only is your social security benefit reduce but also the benefit to your dependents.

Due to these restrictions, this filing strategy yields that greatest benefit to parents that are either fully or partially retired, age 62 or older, with a child or children below the age of 18.

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.