RMR Wealth Management Blog

How to Avoid the Most Common Required Minimum Distribution (RMD) Mistakes - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, May 22, 2014

(originally written by Barry Glassman)


When you put earned income into a tax-deferred account like an IRA or a 401(k), Uncle Sam eventually wants to collect those taxes. So starting in the year you turn 70 ½, the IRS requires that you take a Required Minimum Distribution (RMD). It’s important to know when and how much to take to avoid hefty penalties. Here are the Top 5 mistakes people make with RMDs and how you can avoid them:

1.       Knowing when to take the first distribution

One of the most confusing RMD requirements and the question most people ask is, “When do I have to start taking my required minimum distributions?” The clock starts the year that you turn 70 ½, but you can delay taking that first distribution until April 1 of the year following the year that you turned 70 ½.

Let’s say you turn 70 ½ on November 5, 2014. For this first distribution, you can elect to either take the RMD by December 31 of 2015, or wait and take it by April 1 of 2016. Keep in mind that if you delay your first RMD distribution to 2016, you’ll have to take two RMDs in that year, one for the delayed initial year, in this case due by April 1, 2016 and one for the prior year, due by December 31, 2016.

2.       Missing a required distribution

The most common mistake people make is to forget to take a required minimum distribution each year. As I mentioned above, with the exception of the first year, RMDs must be taken by December 31 each year. If you fail to take the full required distribution by December 31, the IRS will impose a 50% penalty for the amount not taken on time.

3.       Not calculating your RMD correctly

Many people forget to include all their retirement accounts when calculating their RMDs. These accounts include:

•Profit-sharing plans
•Traditional IRAs, as well as IRA-based accounts such as SEPs, SARSEPs and Simple IRAs
•Traditional and Roth 401(k) and 457(b) plans
•403(b) contracts
Your RMD calculation is based on the December 31 balance in those accounts so you’ll need to have your December account statements handy.

If you have multiple IRAs, you can add those balances together and treat the calculation as one. The same goes for 403(b) contracts.

4.       Taking the distribution from the wrong account

RMDs from multiple IRAs or 403(b) accounts can either be taken from each account, or aggregated and taken from just one account. But keep in mind that you can’t take those distributions from another type of plan, i.e. you can’t take an IRA distribution from a 403(b) account or a 401(k) distribution from an IRA account.

401(k), 457(b) and profit-sharing plans cannot be aggregated. Each RMD must be calculated separately and taken from that account.

5.       Not planning ahead for your RMDs

The world of RMDs is complicated with exceptions and rules for many circumstances from naming beneficiaries, to the treatment of inherited IRAs, and those still employed at 70 ½, not to mention tax planning for RMDs. This list is long and mistakes are all too common, so it’s a good idea to seek advice from your accountant or financial planner before it’s time to take them. For answers to many RMD questions, a great resource to consult is The Slott Report - American’s IRA expert.

Required Minimum Distributions, like death and taxes, are a fact of life for those who deferred taxes on their income. While you can’t escape this requirement, by understanding the details, at least you’ll avoid costly penalties.

Your Financial Checklist For Every Stage of Life - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, May 01, 2014

(originally written by Laura Shin)


A good friend of mine messaged me recently. She was facing the big 4-0, and, as people are wont to do around significant ages, she got to thinking about some big questions.

Because life and money are inextricably linked whether we like it or not, her transition into a new decade also made her wonder how one’s financial priorities should change as the years pass.

Your financial goals should, in fact, shift along with your situation to serve your biggest needs. Some of your concerns will be long-term — for instance, saving for retirement takes place across decades — but that doesn’t make shorter goals, such as saving for a down payment on a home, any less challenging. Knowing what financial milestones to hit when will help you ensure that you don’t have to scramble for any of them.

“Most people when they’re getting into the workforce or out of college don’t look at their overall financial picture. You’ve got to look long term and short term as well. The earlier you look at the short-term milestones, the easier it will be to secure your retirement in your future years, so getting situated in your 20s makes it easier to plan in your 40s, 50s and 60s,” says Andrew Rafal, partner and cofounder of Phoenix-based Strategy Financial Group.

Here’s a cheat sheet on what financial tasks you should take on when. Keeping in mind that people hit different milestones at different times — for instance, some marry and become parents in their 20s and others in their 40s — these money to-dos are tied to life landmarks rather than ages.

New Grad, Entering The Workforce

1. Make a budget.

Know what your income is and learn not to spend more than that. That’s how you’ll start to build your wealth. Here’s a primer on how to create a budget.

2. Track your expenses.

Plenty of online aggregators, such as Mint or EMoney, will hook up to all your financial accounts so you can get an easy snapshot of where your money is going, how your investments are doing and other trends in your finances, like your net worth. That information will help you make smart choices and reach some of the more challenging goals. “Having the visual of your income and expenses is the first step to building that retirement plan,” says Rafal.

3. Pay down your debt.

If you have credit card debt, that is higher priority than your student loan debt. “Most credit card loans debt will be three to five times higher in interest than the student loans, so we’d want to focus on paying those down first, and pay the minimum to student debt,” says Rafal. Once you pay off the cards, then you can pay more than the minimum on your student loans.

4. Start saving for retirement.

If your employer offers a 401(k), 403(b) or similar retirement account and offers a match, do what is required to get it. For instance, if you need to contribute 4% of your salary to get that match, be sure to do so. It’s free money from your employer. If you can afford it, also begin contributing to a Roth IRA. Use this guide to see how you should set up your financial accounts.

5. Designate beneficiaries on your financial accounts.

When you name a beneficiary on an account, you’re designating who should receive the assets in the event of your death. This is a basic financial task you’ll have to return to, as your life changes. For now, you’ll probably want to name your parents or siblings, presuming you’re not married.

6. Start your estate planning.

Get a power of attorney, which designates someone to act on your behalf in business and legal matters should you become incapacitated, and a living will, which outlines in advance what actions you’d like taken regarding your health should you no longer be able to make those decisions yourself. Also, name a health care proxy, which is a power of attorney for your health decisions.

7. Get disability insurance.

If your employer doesn’t offer it and you can afford it, this insurance will provide you an income stream should you become unable to work. “It’s critical, whether you’re in your 20s, 30s, 40s, 50s or 60s,” says Rafal.

Advancing In Your Career

1. When you switch jobs, be sure to negotiate.

The earlier you start earning more, the more you’ll earn over your lifetime, as those increases compound on each other . Learn here how to negotiate your salary.

2. Also, take your retirement money with you.

Especially since people nowadays tend to stay at companies for shorter periods than prior generations, make sure to take your 401(k) or 403(b) money with you when you go. You can either roll it over to your account with your new employer or move it into an IRA you control at a brokerage firm of your choosing.

3. Start working with a fee-based financial planner with an eye on retirement.

Find a planner who will work with you for a couple of hours for a flat fee. He or she can give you a high-level overview of what you should be focusing on money-wise and how you can save for the marathon financial goal of saving for retirement.

“They can show you saving a certain amount every month at a certain rate of return — this is how much you’ll have in the future. In the 20s or 30s, that’s something we don’t really think about the future. We focus on the short-term. But having someone explain that to you and map it out, that’s critical for success,” says Rafal. Find out here the 10 questions you should ask a potential financial advisor.

Getting Married

1. Create (or update) your will, and update your beneficiaries, power of attorney, health care proxy, etc.

Most people will want to update these to name their spouse.

2. Look into getting life insurance and re-evaluate other insurance policies.

Some couples will opt to get life insurance right away and others might wait until they have children. It depends on your situation and predilection. Some couples in which each partner earns roughly the same amount may opt not to, but others in the same situation might buy life insurance simply to lessen the blow of the loss of that income during an already difficult time. “With both [people] earning and the fact that term insurance is cheap, it’s one of those things we hope we never need to utilize, but it’s just part of that asset protection. If somebody does pass away early and you’re grieving, it’s just another piece of covering the what-if scenario,” says Rafal.

Look into getting group term insurance, which will cover you for a period of time, through your employer, or if you feel you need extra coverage, buy your own individual term insurance.
Also, if, through marriage, two health insurance policies become available to you, compare them to see if it makes the most sense for both of you to be on one. Re-evaluate if your disability insurance coverage would be adequate, and add your spouse to your auto insurance coverage.

Buying A Home

1. Buy a house that won’t put too much stress on your assets.

“Don’t overextend,” says Rafal. “Work with an investment advisor and a mortgage broker to make sure when you purchase that home that you’re comfortable with your income and debts.”

2. If you’re married and haven’t bought life insurance yet, look into it now, and update your disability insurance.

Now that you’re taking on a big debt together, it may make sense to get life insurance so that if something happens to one of you, the survivor can still pay the mortgage. Make sure your disability insurance policy would cover the cost of your home.

Having Children

1. Review your estate plan.

Draw up a will if you haven’t yet. “Work with a licensed attorney to make sure not only the assets are protected and but that you’re protecting against incapacity and that if anything does happen, your children will go to the right guardian,” says Rafal.

Establish a trust if you have substantial assets and would want to leave your assets to your children in a way not immediately payable to them upon your death.

2. Start saving for their college education.

Open a 529 account for them, and get in the habit of saving every month with automatic transfers, but if you have to choose, make saving for retirement a higher priority. Your children can always take out student loans, but there are no loans for retirement , and if you save for their college over your retirement, they may end up having to support you later on.

3. Relay financial lessons to your children.

Instill good habits in your children starting from a young age.

Established In Your Career

1. Max out your retirement contributions.

At this time, you’re probably earning the most you’ll earn in your life, so you want to make sure to save as much as you can in both your employer-sponsored retirement account as well as in your own Roth IRA or traditional IRA.

2. Be proactive in your tax planning.

Meet with a licensed CPA to maximize your deductions, since this is also the time when you are likely to be paying the highest taxes. You may also want to set up a Health Savings Account, which will allow you to save on health expenses with pretax money, while also potentially using that money as an investment vehicle.

Also analyze your investment choices according to your tax liabilities. Rafal suggests taking more risk in your after-tax accounts such as a Roth IRA or Roth 401(k) where you won’t pay any tax on the earnings of those investments.

3. If you find yourself taking care of your parents, consider their needs in the context of all your financial priorities.

Home health care and assisted living facilities are expensive and those costs need to be weighed against saving for your own retirement and your children’s college educations. Talk with your siblings to come up with a solution that takes into account all your other needs.

4. Consider your own long-term care plans.

“This is also a good milestone to look at, ‘What can I do, so I’m not a burden on my family?’” says Rafal. Investigate traditional long-term care insurance, which would provide nursing-home care, home-health care or other types of personal care for people over 65 who need supervision.

Because many people find long-term care insurance expensive and they are mostly considering buying it right when they are also facing the financial challenge of retirement (usually in the 50s), many opt not to buy an expensive type of insurance that they are not certain they will use. One new option that helps alleviate those fears of not using the insurance is hybrid policies that offer life insurance with a long-term care option attached. However, they require a large upfront investment and offer meager returns, so they are not for everyone. For many, they are more of an estate-planning tool.

5. Begin planning your retirement income.

“Most people work their lives, they build assets and accumulate but don’t have a plan on the way down,” says Rafal. To turn from this accumulation mindset to the decumulation mindset, talk with your financial planner about how best to turn your savings — your 401(k), IRA, Social Security, pensions, etc. — into income. Consider buying an annuity, in which you use a chunk of your retirement savings to buy yourself a guaranteed source of income for a certain time period.

Learn how the age at which you take Social Security will affect the amount you receive, about required retirement income distributions, how to pull money from different retirement accounts without getting hit with a big tax bill, etc.

This would be a good time to talk to a new type of financial planner called a Retirement Income Certified Professional (RICP), who specializes in helping people turn their retirement assets into income. An RICP can look at important financial factors such as whether you might outlive your nest egg considering inflation and best- and worst-case scenarios when it comes to your investments, health expenses and more.

6. If need be, catch up on retirement contributions.

If you’re behind on building your nest egg, at age 50, you can start contributing higher amounts to your 401(k) (an extra $5,500 annually in 2014) and IRA (an extra $1,000 in 2014).


1. Know your budget.

Even before you retire, know what your income and expenses will be. With your planner, review your plan for turning your assets into steady income in the most tax-efficient way possible. Also discuss when the best time is for you to start taking Social Security. Make sure you’re familiar with the biggest money mistakes retirees make so you can avoid them.

2. Review your investments.

Look at your risk tolerance to maintain the nest egg you built and not suffer a big loss right at the beginning of your retirement.

3. Downsize.

A smaller home could help reduce your property taxes, utilities and other expenses. Moving to a new community could also have social benefits.

4. Look at how to fund potential long-term care costs.

If you didn’t opt to buy a policy before, look at how you could self-fund, sign up for a long-term care or hybrid policy now, or work out a plan with your family.


1. Don’t make any immediate changes.

Work with a trusted advisor to make sure your retirement plan is still on track. If there are life insurance proceeds, invest based on your current goals.

2. Review your estate plan.

“You may have developed an estate plan years ago that hasn’t been updated. Work with an attorney so if you’re incapacitated, loved ones can step in and make both medical and financial decisions for you. Also, make sure the assets can pass to family in way you intended at this point in your life,” says Rafal.

3. Downsize, and consider moving to a full retirement community.

These types of homes have a range of activities and can accommodate independent living as well as offer some assistance and even full-time care.


Are You Set To Pay A $262,800 Nursing Home Bill? - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, April 15, 2014

(originally written by Richard Eisenberg)


Today is one of the most depressing, but significant, personal finance days of the year. And I’m not referring to Tax Day Minus One.

I’m talking about the release of the annual Genworth Cost of Care Survey — the median cost of long-term care in nursing homes, assisted living facilities and at home.

The news is never pretty, but some of this year’s numbers are especially scary. As Bob Bua, Genworth Vice President, told me: “The consumer needs to be educated how expensive this is.”

How expensive?

$87,600 for a Nursing Home

The median annual rate of a private room in a nursing home is now $87,600, according to Genworth. That’s up a stunning 4.35% over 2013. Over a three-year period — the longest most nursing home residents stay — that room would cost $262,800, assuming its price doesn’t continue rising.

A semi-private room in a nursing home now runs $77,380, Genworth found. That’s an increase of 2.62% from the previous year.

Key Long-Term Care Costs Outrunning Inflation

Those price rises are substantially more than U.S. inflation overall. Inflation only increased 1.5% last year; medical price inflation rose 1%, according to the U.S. Bureau of Labor Statistics. (Hospital and related services spiked by 4.9%, however.)

If these nursing home costs surprise you, you’re in good company. A recent AP/NORC survey found that 58% of people underestimate the costs of a nursing home. You can test your long-term care knowledge at a clever quiz that PBS Newshour created.

Other figures from Genworth’s report:

•The median national cost of a room in an assisted living facility is now $42,000, up 1.45% from 2013.
•Hiring a home health aide for long-term care costs $20-an-hour or $45,188 annually (median rate). That’s a one-year increase of 1.59%.
•It costs $43,472 a year ($19 an hour) to employ someone to handle homemaker services. These include things such as shopping, cooking, cleaning and transportation to doctors’ appointments. That figure is up by a striking 4.11% over 2013.

Genworth’s CareScout subsidiary compiled its data by surveying nearly 15,000 long-term care providers in 440 regions nationwide. It has published results every year since 2004.

Why You Should Care About Long-Term Care Costs

The reason these numbers matter so much: If you live to 65, there’s a 70% chance you’ll need some form of long-term care services in the future. The number of Americans needing long-term care services and supports is expected to mushroom from 12 million in 2010 to 27 million in 2050, according to the U.S Department of Health and Human Services.

As I reviewed the Genworth survey, I was quite surprised to see the nursing home private room rate soar by more than 4% in a year.

When I asked Bua what he thought accounted for that, he explained that most people in nursing homes stay in semi-private rooms since Medicaid often pays for that. “So the private-room rate is a chance for nursing homes to be a little more profitable to help cover the costs of government reimbursement,” said Bua. “A private room has a lot of value to some people. And if they have the money, they’ll pay for it.”

Bua said the 4.11% rise in homemaker services “was a surprise to us.” He thought that might be due to increased demand for home care by people needing long-term care (and their families) rather than nursing homes and assisted living facilities.

Big Cost Differences Depending on Where You Live

Genworth’s study also showed sizable regional variation for long-term care costs.

The median cost of a private room in a nursing home now ranges from $57,488 in Oklahoma to $240,900 in Alaska; a semi-private room goes from $52,925 in Oklahoma to $237,250 in Alaska.

Aside from Alaska, nursing home rates are highest mostly in the Northeast, the Northwest, California, Washington state and Hawaii, where they typically hover around $100,000 or more.

While $42,000 is the median rate for an assisted-living facility, the cost exceeds $60,000 in Alaska, Connecticut, Delaware, Massachusetts, New Jersey and Washington, D.C.

Costs vary much less regionally for home health aides and people providing homemaker services.

What the Numbers Mean For You

So what do the study’s results mean for you and your family?

If you’ll be looking for long-term care for your parent or a loved one, don’t assume that the care will necessarily be better just because it’s more expensive than in another part of the country. Bua said there’s no correlation between an area’s higher cost of care and the quality of services provided.

That said, you may well want to factor in the huge geographic cost differences for assisted living facilities and nursing homes when looking for a place to provide care for financial reasons.

“Absolutely, this is one of several factors to consider,” said Bua. “It’s also a factor to consider when thinking about where you will want to live in retirement.” After all, you may need long-term care someday too; most Americans over 65 do.

Genworth’s website lets you compare the minimum, maximum and median cost of long-term care in each state and see the compound annual median growth rate over the past five years.

The new Genworth numbers also provide yet more evidence that you need to save a good chunk of money for potential long-term care costs.

Only 35% of Americans have done so, however.

8 Retirement Questions A 50-Something Couple Needs To Answer - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, April 10, 2014

(originally written by Janet Novack)


As an economist, MIT prof James Poterba can run a regression analysis and assume a can opener (see footnote 1) with the best of them. After all, he is president of the National Bureau of Economic Research, the wonky organization that officially determines when U.S. recessions start and end. But Poterba, who has studied savings behavior and retirement for decades, also has a knack for turning what economists know (and don’t know) into insight for the rest of us.

Last week, during a speech at a Washington retirement conference sponsored by the Investment Company Institute (the mutual fund companies’ trade group), the 55-year-old Poterba set out eight questions he’s come up with to help 50-something friends, neighbors and relatives think about whether they’re saving enough for retirement. Considering the answers in your own case could help you figure out whether you need more or less savings than one or another rule of thumb calls for. Fidelity Investments, for example, suggests you should have five times your salary in 401(k)s and IRAs by age 55. That’s unrealistic for low earners who will be relying primarily on Social Security, but might be too low if you have Methuselah genes and plan to retire at 62 to travel the world.

Here are Poterba’s questions, along with a few of his insights and my two cents worth of advice.

“When Will We Retire? Will We Control That Choice?”

The good news for retirement security is that the labor force participation rate of those aged 65 to 69 has been steadily climbing since 1985; Poterba’s calculations show that much of the average increased life expectancy at 65 is actually being spent in extra years of work, not retirement. But the second part of his question—about control—is crucial too. Those nearing retirement typically say they plan to work longer than they end up doing. So a little slippage is normal. But being forced, by layoff or ill health, to stop working years before you planned is likely to land you on rocky financial ground in retirement.  Fifty is a good time to take a hard look at your industry and career prospects. If they’re not so hot,  amp up your savings. (Yep, fellow print journalists, that means you.) It’s also a fine time to refresh your skills and your contacts and to start a side-gig that can help you switch careers or become self-employed if you lose your job.  (Some smart—and tough–advice from Kerry Hannon on job hunting over 50 is here.)

“How Long Will We Live?”

Forget average life expectancy. One of the most striking slides in Poterba’s presentation showed just how much male life expectancy at 65 has diverged by income. For men turning 65 in 1977, the top half of lifetime earners could expect to live an average of 15.5 years, versus 14.8 years for the bottom half. By 2006, male life expectancy at 65 for the top half of earners had risen a full six years to 21.5 years, while the bottom half had gained less than a year and a half, creeping up to 16.1 years on average. But don’t just generalize based on your earnings. As I wrote in January, your personal life expectancy is the essential number for retirement planning.  Take some time to run the Living To 100 individual life expectancy calculator (which includes detailed questions about your family history and present health) as well as this couples calculator for joint life expectancy.

“What Will We Do When Retired? Municipal Golf Course or Country Club? Early Bird Specials or Four Star Restaurants?”

Some of the most interesting research has to do with retirement spending patterns. Spending “falls at the moment of retirement by about 10%,’’ noted Erick Hurst, an economics professor at the University of Chicago Booth School of Business. It’s not just that work related costs (commuting, new work clothes, dry cleaning) disappear. Hurst’ research shows retirees substitute time for money; for example they shop more for bargains and spend more time cooking. They don’t cut out tablecloth restaurants, but they do cut back on fast and convenience food. Bottom line: they live just as well, if not better, but for less. Yet not every couple spends less. Michael Hurd and Susann Rohwedder of the Rand Center for the Study of Aging have found that the wealthiest quartile of retirees actually increase spending—anywhere from 7% to 18% depending on how it’s measured—as they travel and make other expensive uses of new leisure time.

Note, however, that even retirees who start-out spending big reduce their consumption outlays as they age—and not because they’re short of cash. (Indeed, those 85 plus increase their giving to charity and relatives, Hurd noted in an interview.) So while financial planners used to routinely assume you needed your income to grow with inflation each year—and most planning software still does—practitioners are now adjusting their models to assume spending declines after 75, reported Stephen Utkus,  director of the Vanguard Group’s Center for Retirement Research. “It’s much more practical. It recognizes that consumption declines with fragility and aging,’’ he observed.

How Much Of Our Retirement Should We Expect To Live Together? How Much Less Do Widows Need? “

Go back to that Living to 100 calculator. Compare results. A woman’s usually longer life expectancy, coupled with the fact that men are  at least four years older in a third of U.S. marriages, makes this a big issue for many couples. Think about strategies to maximize the surviving spouse’s welfare, without preventing you from enjoying your early retirement years together. Pay particular attention to Social Security claiming strategies for couples and to survivor’s benefits; if a higher earning husband waits until 70 to collect the largest possible Social Security check, his widow will get that bigger Social Security monthly check in place of her own smaller benefit. As I wrote last week, if you plan to move to the outer suburbs or a rural area for retirement, consider how an 80-something or 90-something widow will get around if she stops driving or cuts back drastically.  Look for a suburb that allows high-density apartments, as well as single family homes; that way she can downsize and address both budget and transportation limits—without having to leave her social networks behind.

What Will Government Transfer Programs Look Like?”

“If you’re in your 50s today, and you’re thinking about a life expectancy which has a reasonable probability of taking you out until your 90s,’’ said Poterba, there’s a “material risk” that these programs could be changed. He didn’t speculate about what those changes will be, so I will. For one thing, middle and upper income seniors will be required to pick up a bigger share of Medicare costs. Already, couples with adjusted income above $170,000 and singles earning more than $85,000 pay additional premiums ranging from $42 to $230 extra per person a month. For those now under 55, House Budget Committee Chairman Paul Ryan (R-WI) would convert Medicare into an income based “premium support” or “voucher” program, which would end up requiring seniors to pick up a greater share of rising costs.

As for Social Security, it remains (at least this election year) a political sacred cow. In their Fiscal 2015 budget proposals, both Ryan and President Barack Obama backed away from earlier “chained CPI” proposals that would have reduced yearly inflation increases for beneficiaries. I consider big changes to Social Security for those already over 55 unlikely. Still, without tax increases or benefit trims, Social Security (under its current budgetary treatment) will be able to pay just 77% of promised benefits when its “trust funds” are exhausted in 2033, Chief Actuary Steve Goss noted. So the better-off could well see some cuts. To put that in perspective, in 2013 the highest-income quartile of seniors got just 18% of  total income from Social Security, Poterba calculates. By contrast, he noted, the poorest fourth of seniors relied on Social Security for 85% of their income.

Side note: The Obama Administration has said it is looking into limiting the “aggressive” strategies better off couples use to maximize their Social Security take. Goss confirmed at the conference that the  “file and suspend” strategy is the target and that any change would take  Congressional action—meaning it can’t be done suddenly by regulatory fiat, which is the way the Social Security Administration suddenly killed the “do-over” strategy in 2010.)

“Will Our Children Support Us? Will We Support Them?”

For higher income folks, Poterba said, “this may turn out to be a very important question, because what they would like to do for their children may be much beyond consumption for themselves.” Okay, maybe you’re ready to cut your Millennials loose. But some boomers, Poterba observed, are still also asking themselves “`What if my parents need long term care in their 90s?’” Indeed, boomers who earned and saved equal amounts could face very different retirement prospects based on whether they have to help support their parents or receive an inheritance from them.

How Will We Pay For Health and/or Long Term Care?”

That, as Poterba’s question suggests, is a big issue. But for my money it is best addressed as part of an overall saving and spending plan, not by going out in your 50s to buy long term care insurance. UCLA economics prof Kathleen McGarry noted that while out of pocket spending is large in the last year of life, it increases with income. It is unclear, she said,  how much of it is in fact discretionary—representing, for example, a preference for staying at home with paid health care aides to avoid having to enter a nursing home.  Meanwhile, new research by Rohwedder, Hurd and Pierre-Carl Michaud projects that a higher share of the population will enter a nursing home before death, but for shorter average stays, than previously thought. That more predictable, but smaller, expense suggests buying LTC insurance makes sense for fewer people and strengthens the case for self-insurance (that is, saving for nursing care), Anthony Webb, an economist at the Center for Retirement Research at Boston College, said in an interview. With current LTC policy holders facing the possibility of big premium increases and the market for new LTC policies shrinking, better off folks might instead consider buying deferred fixed annuities to cover the possibility of late in life long term care costs. As William Baldwin explains here, if you’re still healthy at 60, you can buy a deferred fixed annuity that starts paying you at 80, whether you need long term care or not. In essence, you’re buying a combined longevity/LTC insurance policy–not an ordinary investment.

What Return Will We Earn On Our Investments?”

Even after you consider all the big personal questions above, the return you earn will decide if savings rate X will produce your desired lifestyle Y.  While you can’t alter the expected returns in the stock and bond markets, take some time at 50 (and periodically thereafter) to understand the relationship between risk and return and your own tolerance for risk. For help, talk to a pro or use sophisticated asset allocation software from Morningstar Inc. or Financial Engines—one or the other is available for free to tens of millions of savers through their workplace 401k plans.  Regardless of how you do it, find an asset allocation that allows you to sleep at night and hold steady. Within a few years of the market crash of 2008, most boomer retirement investors had recovered—except those who panicked and sold out at the bottom.


Roth or Traditional IRAs: What's Best for Retirees?- posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, April 09, 2014

(originally written by Thomas and Robert Fross)


Individual Retirement Accounts are one of the most popular ways to save for retirement. The two main types of IRAs are Traditional and Roth. As Americans approach retirement, it’s common to ask: which IRA is right for me?

Briefly, Traditional IRAs allow you to make pre-tax contributions – which may be deductible on your federal taxes – that grow tax-deferred and then are taxed during your retirement at your future tax rate. Roth IRA contributions are made after tax, do not qualify as deductions, and grow tax-free. Once certain aging requirements are met, distributions from Roth IRAs are not federally taxed.

Thomas: For retirees who expect their tax bracket to be lower during retirement, a Traditional IRA may be a better choice if they are still working. This way, they can make pre-tax contributions to a Traditional, potentially qualify for the deduction, and then pay taxes on distributions at their lower retirement tax rate.

Robert: Agreed. Clients in this scenario should also consider whether they are eligible to contribute to a Roth IRA. If their income exceeds a certain limit, they may not be eligible to contribute to a Roth that year.

If you are already retired, but still earning income, you need to consider the age limits placed on IRA contributions. Roth IRAs have no age limit on contributions (as long as you can show earned income,) but you cannot make a participant contribution to a Traditional IRA after your 70th year.

Thomas: Many retirees maintain both types of IRAs. If you are eligible to contribute to both, you may split your contributions between your Roth and Traditional IRA. Under this strategy, it’s common to contribute the deductible amount to your Traditional IRA and the balance to your Roth; however, keep in mind that your total contribution still cannot exceed your limit for that tax year. It’s also important to consider the extra costs associated with maintaining multiple accounts.

Robert: Another strategy you may have heard of is a Roth conversion, which allows you to convert a Traditional IRA into a Roth by paying taxes on your contributions and earnings. This is frequently done during periods of market decline or when your tax bracket falls. The tax and financial implications of a conversion can be complex and it’s important to consult a financial advisor who can help you understand if a conversion may be right for your needs.

Thomas: For many taxpayers, the choice comes down to whether or not they are eligible to deduct their Traditional IRA contributions on their federal taxes. This depends on whether you are an active participant in an employer-sponsored retirement plan.  If not, then you may be able to deduct the full amount of your contribution. The rules regarding active participant status are tricky and it’s best to consult a tax advisor who can help you understand your personal situation.


As with most retirement topics, there’s no simple answer about which IRA is best for you. From a general tax perspective, a Roth may be a better choice if you do not expect your tax rate in retirement to be lower than your current rate; this will allow you to pay taxes on contributions now and receive tax-free distributions during retirement, when your taxes may be higher. On the other hand, if you expect that your tax rate will be lower in retirement, contributing to a Traditional IRA may be a smart option if you can receive a tax deduction now when your taxes are higher.

Ultimately, knowing which IRA suits your needs depends on a careful evaluation of the short-term and long-term benefits of each and an understanding of your current and future financial situation.

Securities and advisory services offered through SII Investments, Inc., member FINRA, SIPC and a Registered Investment Advisor.  Fross and Fross Wealth Management and SII Investments, Inc. are separate companies.  SII does not provide tax or legal advice.


The New New York Estate Tax Beware A 164% Marginal Rate - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Thursday, April 03, 2014

(originally written by Ashlea Ebeling)


It’s no April Fool’s joke. New York state doubled its estate tax exemption as of today. And it’s set to rise gradually through 2019—if you hang on that long–to eventually match the generous federal exemption, projected to be $5.9 million by then. That will sure make planning much easier for a lot of folks, but there are still big traps in the new law to watch out for.

One trap in New York is a new “cliff,” so called because if it’s triggered you basically fall into a state estate tax abyss.

Before April 1, 2014, the amount an individual could leave at death without owing state estate tax in New York was $1 million, one of the lowest exemption amounts in the 19 states (plus the District of Columbia) that impose state level death taxes. That meant you’d pay New York estate tax (at up to a 16% top rate) on your assets above $1 million.

Move up http://i.forbesimg.com t Move down Where The 304,118 U.S. Millionaire Earners Live  Ashlea Ebeling Forbes Staff   Maryland To Cut Estate Tax As Blue States Fall In Line  Ashlea Ebeling Forbes Staff   Minnesota Flip-Flops And Repeals Gift Tax, Leaving One State With Hated Tax  Ashlea Ebeling Forbes Staff   Estate Tax Repeal In North Carolina Means Big Tax Savings For Some  Ashlea Ebeling Forbes Staff  
As of April 1, 2014, the exemption amount is $2,062,500.  That shields way more people from the state levy. But if you die with just 5% more than $2,062,500, you face a cliff. That means you’re taxed on the full value of your estate, not just the amount over the exemption amount.

Here’s an example of how the new law could translate into a marginal New York estate tax rate of nearly 164%, courtesy of the New York State Society of CPAs in this comment letter on the proposed law. By the time the exemption is $5.25 million in 2017 and 2018, a decedent with a New York taxable estate of $5,512,500 (that’s 5% more than the exemption), would pay New York estate tax of $430,050. In effect, there is a New York estate tax of $430,050 on the extra $262,500. “We do not believe that this cliff is consistent with the Governor’s objectives of making New York a more favorable environment for New Yorkers during their golden years,” the letter says. Oh well.

Here’s the rundown of the new exemption schedule:

For deaths as of April 1, 2014 and before April 1, 2015, the exemption is $2,062,500.

For deaths as of April 1, 2015 and before April 1, 2016, the exemption is $3,125,000.

For deaths as of April 1, 2016 and before April 1, 2017, the exemption is $4,187,500.

For deaths as of April 1, 2017 and before January 1, 2019, the exemption is $5,250,000.

As of January 1, 2019 and after, the exemption amount will be linked to the federal amount, which the IRS sets each year based on inflation adjustments—it’s projected to be $5.9 million in 2019. The top rate remains at 16%. (The original budget and the Senate bill had proposed a top rate of 10%.)

In addition to the cliff, there are other problems with the new law. For one, there is no portability provision like in the federal law—that allows a surviving spouse to shelter twice as much without the use of complicated trusts–notes Sharon Klein, managing director of Family Office Services & Wealth Strategies with Wilmington Trust.

There’s a three-year look-back for taxable gifts (those gifts are pulled back into your estate) for gifts made on or after April 1 and before Jan. 1, 2019, but not including any gift made when the decedent wasn’t a New York state resident.

There are basis questions, depreciation questions, and different treatments of estate planning transactions under federal and New York income tax laws, says Donald Hamburg, an estate lawyer in New York City. “What’s troubling is that there are so many open questions. It’s a highly complex set of rules,”  he says.

Estate Planners Shift Gears in New Tax Environment - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, March 21, 2014

(originally written by Andrew Osterland)

Wealthy individuals aren't the only ones struggling to cope with higher income-tax rates and the new 3.8 percent investment income tax funding the president's health-care plan. The beneficiaries of trusts—wealthy or not—are also feeling the bite, and estate planners are trying to figure out ways to reduce it.
Trusts are separate legal entities created by a person or organization and managed by a trustee for the benefit of others—very often spouses or children of the trust creator. They allow a person to remove assets and property from their own estates, thereby avoiding the estate tax when they die, and enable them to control how and when assets are distributed to their beneficiaries.
The bigger tax hit
The variety of trusts and the rules that govern them are enormous. So-called simple trusts pay out all the income they produce to beneficiaries, who then don't face income taxes. With grantor trusts, the creator of the entity is deemed the owner and thus faces all tax liabilities stemming from its administration. However, for the rest of the universe of trusts—call them complex, nongrantor trusts—income taxes have become a much bigger deal.
The reason is that, for tax purposes, trusts are treated like wealthy individuals—only worse. While the new 39.6 percent marginal tax rate created by the American Taxpayer Relief Act applied to income over $400,000 for individuals last year, it kicked in at an income threshold of just $11,950 for trusts. The 3.8 percent Medicare surtax applied to the net investment income of individuals earning more than $200,000 also hit trusts starting at that lower threshold.
The upshot is significantly higher tax bills. Assuming no capital gains income, a trust holding $1 million in assets and making a 10 percent return last year paid income taxes of $34,868 and new Medicare taxes of $3,346. That's nearly $7,400 more than it would have paid in 2012 on the same income.
While minimizing taxes is certainly not the only, nor even the primary, objective of trusts, it is a major issue for trustees with a fiduciary responsibility.
"The objective is to maximize the amount of money that family members [or other beneficiaries] receive," said Ronni Davidowitz, head of the trusts and estates practice at legal firm Katten Muchin Rosenman. "Estate planners have to revisit some of their planning patterns of the past and reevaluate what makes sense now."
Dealing with the tax hit
One strategy to reduce the tax hit is to invest more of the trust's assets in tax-exempt securities, such as municipal bonds.
"The new investment income taxes have caused some clients to think about whether they can handle higher allocations to municipal bonds," said Lisa Whitcomb, director of wealth strategies at Glenmede, a privately owned trust company managing more than $25 billion in assets. However, the still-low yields on muni bonds—and the fact that tax-reform proposals from both political parties have proposed taxing muni bond interest—have made people wary, she added.
A more difficult decision is whether a trustee should consider making larger distributions to beneficiaries. If those beneficiaries are in a lower tax bracket and not subject to the new Obamacare taxes, the distribution can save a lot of money. "If it's in the discretion of a trustee to distribute assets, the additional level of tax is an aspect of what you have to look at," said Davidowitz.
It's still only one aspect, however. A bigger distribution may not be permissible under the trust's governing documents, and it may not make sense based on the circumstances of the beneficiaries. If their beneficiaries are minors or deemed not responsible enough to handle larger sums of money, trustees are likely wary of making the distributions, despite potentially positive tax consequences.
"Saving taxes is not the be-all and end-all of managing trusts," said Laura Twomey, a partner with law firm Simpson Thacher & Bartlett who specializes in estate planning. "There are a lot of non-tax issues involved in distributions to beneficiaries, and you have to be aware of the intentions of the creator of the trust."
Nevertheless, bigger distributions can make sense in some situations, said Whitcomb. According to her, while only two or three of the hundreds of trusts that Glenmede manages elected to make additional distributions for the 2013 tax year—the deadline for making them was March 5—it's the right thing to do in some cases, she said.
"Many trusts created years ago are in their third or fourth generation of beneficiaries, and those beneficiaries may be competent, normal adults who are not among the high-net-worth individuals who created the trust," said Whitcomb. "A bigger distribution might be a real boon for them."
With higher income taxes likely an ongoing issue, trustees may want to consider the option more closely.

Donor-Advised Funds: Can This New Trend Save You On Taxes? - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Tuesday, March 11, 2014

(originally written by Alden Wicker)


There’s no doubt that donor-advised funds appear to be gaining traction, but it’s important to do your homework and understand both the benefits and the drawbacks of DAFs, including typically higher minimum contributions. So read on to find out how donor-advised funds work, whether they’re right for your financial situation—and how to help make sure your money is actually going to a good cause.

How Donor-Advised Funds Work

Put simply, if a mutual fund and a charity had a baby, it would produce a DAF. When you put money into a DAF, what you’re doing is taking funds that you’ve earmarked for a good cause and transferring them over—irrevocably—into the DAF. (You can also transfer over stocks or mutual funds, which many people do.) Once there, the assets are managed just like a mutual fund, and will hopefully grow tax-free until you’re ready to donate next month, next year or ten years from now. You can also dictate which nonprofit will receive the money and how much, and then the DAF writes out the check, so to speak. Seems simple, right?

Robert Berger, founder of the blog doughroller.net, is a big fan of DAFs. He and his wife use one for their charitable gifts. “In our case, it’s extremely easy,” he says. “We opened ours with Vanguard since we have a lot of investments with them. I literally just log into the charitable account, and I can transfer the individual stocks we own or Vanguard mutual funds. It takes a couple of minutes.”

4 of the Benefits of DAFs

Now that we’ve gotten the basics of how donor-advised funds work out of the way, here’s a simple breakdown of how these funds may be able to work in your favor:

You may get a hefty tax deduction. When it’s time to do your taxes, you can deduct the full market value of your donation in the year that you donated. So if you bought $10,000 of stocks, and they appreciated to $15,000 in that tax year, if you moved them into a DAF, you get to deduct $15,000 on your taxes.
You get tax-free growth. Once the assets are in the DAF, they appreciate tax-free. And you can even decide how to invest the money, whether it’s in long-term growth stocks if the plan is to donate years from now, or short-term bonds if you want to donate soon.
You can typically donate to charities that don’t accept stock. “The primary reason that my wife and I became interested was because it was an easy way to contribute appreciated stock,” Berger says. “We give a fair amount of money to small charitable organizations that aren’t equipped to receive stocks or mutual funds, so when we decide that we want to make such a grant to a specific charity, Vanguard actually gives them a check for cash.”
Donating appreciated stock can be a huge benefit. If you had to sell appreciated stock yourself before donating the proceeds, you’d have to pay capital gains taxes, which would eat into the amount that the charity would receive—and your deductible contribution amount. By giving appreciated stock directly, you can help ensure that the full amount will be received by the charity and that your tax deduction is for the current value of the stock, without the impact of capital gains taxes.
You can be more thoughtful about your donation. DAFs allow you to set aside the money (and entitle you to a deduction) now, while also giving you more time to research and come up with a holistic plan for your charitable dollars—like donating annually to a charity instead of all at once, or splitting up the money across several charities. “Sometimes we wanted to make contributions for tax reasons, but we hadn’t decided whom we wanted to contribute to,” Berger says. “With a DAF, we can carry a balance in our charitable fund from year to year, and make contributions to various organizations as we see the need.”
For Hardy, that last perk is particularly desirable. “It kind of makes people feel like they have their own mini foundation,” he says of his clients who have DAFs. “It separates the money for a specific purpose, whereas keeping it in their own account might not feel the same.”

3 of the Drawbacks of DAFs

When it comes to DAFs, the benefits generally outweigh the disadvantages, but there are three things that you should keep in mind before signing on with a donor-advised fund:

It’s irrevocable. “Once you put assets into a DAF, it’s considered a gift—and you cannot take it away,” Hardy says.
There’s a minimum amount that you need to contribute. And it’s usually higher than your typical brokerage account. Hardy says that he’s seen minimums as low as $3,000, but Vanguard, for example, has a minimum of $25,000.
Your chosen organization must be a true nonprofit. DAFs will only give money to registered 501(c)(3) charities, so you won’t be able to give the money to your niece to help launch her business.

And then there’s the fact that the charities themselves don’t always support the idea of giving through a DAF. “It’s worries me that donor-advised funds are so prevalent,” says Gail Perry, a fund-raising consultant from North Carolina. “All that money could be going directly to a charity, but instead it’s being socked away for future use.”

She’s right to be worried.

According to a report from the National Philanthropic Trust, DAFs took in almost $9.64 billion in 2012—but outlaid just $7.7 billion. That’s about $2 billion that never made it to charities.

In all fairness, this could be partly due to donors who never got around to deciding where to give the money. But others surmise that it’s in a DAF’s interest to encourage clients not to give the money to charities because the managers get paid based on the amount of assets under management. So for the sake of ethics, make it a point to thoroughly research your chosen DAF to help ensure that your selected charities benefit too.

Finally—and this could be seen as either a benefit or a drawback—DAFs typically guarantee donor anonymity. “There’s no list of people who have donor-advised funds—it’s private,” says Perry. “So the charities don’t have a way to know who the decision makers are for the money.”

This can be a great thing for people who prefer to donate privately, but it can also be frustrating for a charity that receives a generous donation and doesn’t know whom to properly thank.


Wills vs. Trusts: What's Best For Retirees? - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Wednesday, February 19, 2014

(originally written by Thomas and Robert Fross)


While it can be difficult to confront your own demise, setting up an estate plan is important to ensuring that your wishes are followed and your loved ones taken care of after your death. There are many estate-planning vehicles available to you, but two of the most common are wills and trusts.

Briefly, a trust is a pool of assets (including investments, cash, property, etc.) held for the benefit of a third party – the beneficiary. A trustee is appointed to oversee management of the trust. If you create the trust during your lifetime, it is known as a living trust and you would initially fulfill the roles of trustee and beneficiary. When creating the trust, you would establish how the trust would distribute assets after your death and name additional trustees. In order to fund the trust, you would re-title your assets to be owned by the trust. A will is a legal document that communicates how a person wants his or her estate to distribute assets after death.

The question that many Americans want answered is: is a will or trust best for retirees?

Thomas: I think that trusts are a great way to avoid probate and help control what happens to your assets after you’re gone. Trusts can also avoid making your financial affairs matters of public record and help keep court intervention at a minimum.

Robert: Those are definite potential advantages, but keep in mind that trusts cost more to set up and are more complex. It’s also important to follow through on funding a trust and re-titling assets owned by the trust, otherwise many of the potential benefits of a trust can’t be realized. For many retirees, a simple will may cover all of their bases.

Thomas: While both vehicles can accomplish similar estate planning objectives, a trust is generally more flexible than a will. A trust can allow you to exert greater control over the distribution of your assets; for example, if you choose to leave a large sum to a minor, a trust can establish how and when the child will receive the money after you’re gone. You can also set up a trust to fulfill specific objectives like paying for a child’s education or pursuing your philanthropic causes. A trust can also help your heirs avoid certain estate taxes and stay out of probate court.

Robert:  However, those advantages come with additional costs and complexity.  Once you create a trust, you can’t simply dissolve it the way you can a will.  You must also deal with the added complexity of managing the trust during your lifetime and designate a trustee to handle affairs after your death. The chief benefit of a will is that it is typically low cost to set up and change.

Thomas:  That’s true, but wills have their disadvantages too.   The main disadvantages of wills are that they typically require probate court and can be challenged after your death.


Either a will or a trust may be appropriate for your estate depending on your circumstances and neither is best for all situations.

The ultimate decision about which estate planning vehicle is best for you entirely depends on your personal circumstances and family structure. Each state has different laws regarding the use of trusts and you should definitely consult a financial advisor or estate-planning attorney before making any decisions.

Securities and advisory services offered through SII Investments, Inc., member FINRA, SIPC and a Registered Investment Advisor.  Fross and Fross Wealth Management and SII Investments, Inc. are separate companies.  SII does not provide tax or legal advice.

IRA Exit Strategy - posted by Brian Mayer, RMR Wealth Management, LLC

RMR Wealth Management - Friday, February 14, 2014

(originally written by William Baldwin)


Take a close look at your retirement account. Do you have Mitt Romney Syndrome?
This is an affliction that strikes successful people. They fatten their IRAs and 401(k)s only to discover that compulsory withdrawals, which begin at age 70, hoist them into unexpectedly high tax brackets.
While details of the ex-governor’s IRA are not public, it appears that his tax-deferred savings are well into eight-figure territory. When this fact came out in the presidential campaign, a wave of sympathy was felt in tax-planning offices across the country. What a shame that all that money was going to come out at high ordinary income rates.
You don’t have to be Romney-rich to confront unpleasantness with your tax rates. In fact, many of the surprises in the code leave the wealthy unscathed while doing a lot of damage to families with incomes between $200,000 and $500,000.
There are antidotes. They constitute what Robert S. Keebler, a CPA in Green Bay, Wis., calls “bracket management.”
Consider a Keebler client we will call Harry. Harry is a midwestern engineer in his 60s. His retirement assets will, assuming a conservative growth rate, tote to $7.8 million by the time Harry turns 70. At that point he has to start withdrawing the money so the IRS can get a piece of it. The withdrawals would start at $291,000 a year and follow an upward curve, peaking at $642,000.
That’s a ticket to high tax brackets, on top of which Harry will have other income, like Social Security payments.
Keebler’s solution: prepay some of the tax. Harry will do that with a Roth conversion, turning a portion of pretax 401(k) and IRA money into aftertax Roth money. There’s a tax hit up front, but once savings are Rothified they compound scot-free, with no withdrawal mandate as long as Harry or his wife is alive.
Yes, prepaying tax can make you wealthier. So long as you pay the tax bill with cash now outside the account, the maneuver is a clear winner if your tax bracket in retirement is destined to be the same as it is now. Some lucky people can get an even better deal, paying Roth tax at a low rate now and reducing future income that would otherwise be taxed at a higher rate. You might be in this category if you are retired but not yet collecting Social Security.
For many people between 55 and 70 a Roth conversion is a wise move–but a tough sell. Tara Thompson Popernik is a wealth planner at AllianceBernstein in New York City. She goes into client meetings armed with stacks of colored charts and Monte Carlo simulations. She might be able to show a couple that converting $1 million of IRAs should ultimately make them $500,000 better off. Still they hesitate.
“It’s a hard decision to make and a big check to write,” she says.
Bracket management means knowing just how much more income you can take in before you get kicked into a higher bracket. Perhaps you thought there are just two brackets for you–say, 15% for dividends and long-term gains and 35% for everything else. In fact, you may be subject to any of four bracket boosters.
First, the health care tax. It adds 3.8 percentage points to your tax rate on investment income. It applies only to the extent this income vaults your AGI above a $250,000 threshold (on a joint return). If you have $240,000 of salaries and $35,000 of dividends and capital gains, then your adjusted gross income is $275,000 and the 3.8% surtax hits the last $25,000 of it.
“Investment income” here is what you’re getting off unsheltered assets–say, the dividends on the Chevron shares parked in your taxable brokerage account. The 3.8% tax doesn’t apply to earnings inside a 401(k) or IRA. Nor does it apply to withdrawals from a retirement account.
Now look at some interesting tax interactions. A withdrawal from a Roth doesn’t even affect the health tax, since Roth withdrawals aren’t considered income. But a withdrawal from a pretax account (or a conversion) does go into AGI. In other words, mandatory withdrawals from an IRA loft otherwise unaffected dividends into place to be swatted by the tax.
This is why it might make sense for you to swallow a large tax bite today in order to get your taxable income down in retirement. Today you do a Roth conversion (creating taxable income) and suffer the 3.8% damage on a single year’s worth of dividends. That may spare you, down the road, from 20 years of surtaxes on your dividends.
The other three bracket add-ons are hidden in statutory verbiage that disguises their effect. Nicknames will make it easier to follow the tax code’s twisting trails.
The first we’ll call Clawback. This bracket booster, added a year ago, has the IRS clawing away a portion of itemized deductions. That’s how the law is written. Yet for most people the amount of their deductions is irrelevant to the calculation. Clawback turns out to be just a roundabout way to jack up tax brackets by roughly a percentage point. It affects joint returns with incomes above $305,000.
Next is Kidnap. Exemptions for you, your spouse and your kids get gradually erased in a certain income range. The effect is to boost the marginal tax rate for a family of four by four points, but only if their income is between $305,000 and $428,000.
This affects the Roth strategy for families with incomes just below the Kidnap range. They should probably convert only thin slices of their 401(k)s until the kids are out of college and can no longer be snatched.
Last on our list is Grannyheist. Medicare premiums go up with income. In effect, the tax bracket for a retired couple in the $170,000-to-$428,000 income range is kicked up (with a two-year lag) by two percentage points. Defense: If you are 62 convert now, not when you’re 65.
Clawback, Kidnap and Grannyheist turn a graph of tax rates into a psychedelic up-and-down zigzag. The result is both opportunities and pitfalls. Should you take stock profits this year and losses next? Or the reverse? It all depends on when you do your Roth and where you land on that zigzag. Spend some time with your accountant before doing anything to your portfolio.
Five things to contemplate as you design an exit route for your 401(k):
Charity. You can reduce the tax bill in the year of conversion by being philanthropic. Compress several years of giving into one tax deduction with a “donor advised fund,” one of those charitable prepayment plans offered by affiliates of investment firms, including Fidelity, Schwab and Vanguard.
Geography. No sense Rothifying just before you move to a low-tax state.
Alternative minimum tax. If you’re affected, the odds that you should be doing some Rothifying go up. AMT victims tend to have incomes in the $200,000-to-$500,000 range and live in high-tax states.
Your legacy. Unrothified retirement accounts make for mangled bequests, since heirs will owe both estate and income tax on the money. A law permits heirs to deduct the former in calculating the latter. But this provision goes only halfway to protecting your family from double taxation, says Keebler. That’s because the deduction is for a dollar amount rather than a percentage of the account and because it doesn’t help with state inheritance taxes. So Rothifying should be part of any estate plan.
Congressional whim. Should you worry that you’ll pay tax going into a Roth now only to lose the tax exemption on the way out? Probably not.
Legislators have recently made Roth conversions easier for 401(k) money. Clearly they are desperate for immediate revenue, and the conversion tax spigot would dry up with the least hint of plans to double-cross taxpayers. A bigger political risk, Popernik says, is rising tax rates. That risk makes the case for Rothifying all the more compelling.

Recent Posts




    RMR Wealth Management, LLC is a SEC-registered investment advisor.
    Securities offered through Dinosaur Securities, LLC a member of FINRA, SIPC & NFA.