taxes in retirement and social security · 2021. 2. 5. · 40k ira 20k social security 20k ira 40k...

TAXES IN RETIREMENTAND SOCIAL SECURITY

Jacob BalesAdvisor, James Bales Financial LLC

Securities and advisory services offered through Centaurus Financial, Inc., Member FINRA & SIPC,

a registered investment advisor. Centaurus Financial, Inc. and James Bales Financial, LLC are not affiliated

companies.

• The Financial Advisor presenting this material is in no way employed by, affiliated with, or endorsed by the IRS, the Social Security Administration or any other government agency. The financial professional is not permitted to offer, and no statement contained herein shall constitute tax or legal advice.

• This presentation is designed to provide general information on the subjects covered. Pursuant to IRS Circular 230, it is not intended to provide specific legal or tax advice and cannot be used to avoid tax penalties or to promote, market or recommend any tax plan or arrangement. You are encouraged to consult your personal tax advisor or attorney before making any decisions about your personal situation. Much of the information contained in this presentation is based on current tax rules and policies as stated on IRS.GOV, and is subject to change in the future.

• This presentation is provided for informational purposes only. It is not intended to be used as the sole basis for financial decisions, nor should it be construed as advice designed to meet the particular needs of an individual’s situation. All Examples are hypothetical and for illustrative purposes only. Actual results will vary. No part of this presentation is intended to make an offer of sale or purchase of any specific security or insurance product.

Class Breakdown

• Session One: Understand the current tax environment

• Session Two: Understand Social Security and its nuances

• Session Three: Review tax management strategies

Our Goals for Today:

• Understand relevant changes to personal income tax under the Tax Cuts and Jobs Act of 2017

• Understand the impact of the Tax Cuts and Jobs Act on retirement income streams

• Identify tools and strategies available to middle income retirees

• Avoid the political and stick to the actionable

Married Filing Jointly Brackets - 2020

https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2020

Taxable Income Ordinary Income Brackets

0 - $19,750 10%$19,751 - $80,250 12%

$80,251 - $171,050 22%$171,051 - $326,600 24%$326,601 - $414,700 32%$414,701 - $622,050 35%

$622,051+ 37%


Married Filing Jointly Brackets - 2020

Taxable Income Ordinary Income Brackets0 - $19,750 10% of taxable income

$19,751 - $80,250 $1,975 + 12% over $19,750

$80,251 - $171,050 $9,235 + 22% over $80,250$171,051 - $326,600 $29,310 + 24% over $171,050

$326,601 - $414,700 $66,510 + 32% over $326,600

$414,701 - $622,050 $94,702 + 35% over $414,700

$622,051 + $167,275 + 37% over $622,050



MFJ – Ordinary Income Tax Map - 2020

22% 24%

35%32%37%

10%12%


MARGINAL TAX RATESThe Tax Bracket your last dollar fell into…

Capital Gains and Qualified Dividends Get Different Treatment

• Public Policy goal of different Capital Gains and Qualified Dividends brackets is to encourage investment

• Similar Marginal Tax Concept to Ordinary Income: Only the amount above the threshold is taxed at the higher rate

• Prior to the act, these brackets were linked directly to Ordinary Income brackets, now they stand alone

https://www.fool.com/taxes/2017/12/22/your-guide-to-capital-gains-taxes-in-2018.aspx accessed 1.5.18

https://www.fool.com/taxes/2017/12/22/your-guide-to-capital-gains-taxes-in-2018.aspx

Capital Gains Brackets (MFJ) - 2020

Taxable Income Capital Gains Brackets

$0 - $80,000 0%

$80,001 - $496,600 15%

$496,601+ 20%

https://www.irs.gov/pub/irs-drop/rp-19-44.pdf


0%

15%

20%

MFJ – Long Term Gain and Dividend - 2020



DEDUCTIONS

EXEMPTIONS

CREDITS

Deductions• An amount deducted from taxable income

• Standard Deduction – $24,800 for Married or $12,400 for Single in 2020

• Alternative: Itemized Deductions (Schedule A) • Mortgage interest on debt up to $750,000 of

acquisition debt (not including HELOC)

• Charitable gifts of cash or check up to 60% of income

• State and Local Property Tax up to $10,000

• Additional Deduction for 65+ or Blind remains



Exemptions

• For Being Alive

• $4,050 per person in your household in 2017

GONE!

https://www.usatoday.com/story/money/taxes/2017/12/26/these-9-tax-deductions-are-going-away-in-2018/108910040/ accessed 1.5.18

https://www.usatoday.com/story/money/taxes/2017/12/26/these-9-tax-deductions-are-going-away-in-2018/108910040/

Credits

Incentivize behavior:

• Healthcare Tax Credit

• Earned Income Tax Credit

• Education Credits • Savers Credit • Child Credit

Deductions, Exemptions, CreditsGross Income (MFJ) $38,000Minus Deductions $24,800 Standard Deduction

$1,300 (x2) Deduction for 65+ $27,400 Total

$2,000 IRA Contribution $2,000 DeductionIncome Subject to Tax $8,600Times 10% Tax Rate $860Saver’s Tax Credit for IRA Contribution

$1,000

Total Tax Due $0Deductions and exemptions are based off the 2020 tax year.



Middle Income MFJ Brackets

Deductions

The “Real” Tax System

• Required Minimum Distributions • Capital Gains • Social Security Benefits • Medicare Premiums • Potential Roth Conversions or large

withdrawals from IRAs • 3.8% Net Investment Income Tax • PEP (Personal Exemption Phaseout) • Pease (Itemized Deduction Phaseout) • AMT (Alternative Minimum Tax)

How Do RMDs Work?

• Year You Reach Age 72 (for new filers) • Divide Prior Year’s ending account balance by

Remaining Life Expectancy • All RMDs suspended for 2020! Even Inherited

IRAs and IRAs delayed from 2019

$500,000 Balance

$500,000 / 25.6 = $19,531

How Do RMDs Work? Continued

https://www.irs.gov/publications/p590b/ Accessed 8/23/16

Capital Gains

• Mutual funds pass through (Phantom Gains)

• Rebalancing Triggers

• Long term gains can create ordinary income tax!

Social Security is Taxed based on your other income

Provisional Income

50% of Social

Security Benefit

Ordinary Income

Dividends and Capital

Gains

Non-Taxable Interest

https://www.irs.gov/pub/irs-pdf/p915.pdf Accessed 8/23/16

Benefits Tax Thresholds

• $25,000 (50%) • $34,000 (85%)

• $32,000 (50%) • $44,000 (85%)

https://www.irs.gov/pub/irs-pdf/p915.pdf Accessed 8/23/16

$40,000-$32,000 = $8,000

$8,000 * .5 =$4,000

$0 over Second Threshold

Total Taxable Benefit = $4,000

(10%)

$50,000-$32,000 = $18,000

$18,000 * .5 =$9,000

$50,000-$44,000=$6,000$6,000 * .35 =

$2,100

Total Taxable Benefit = $11,100

(55%)

$40,000 Social Security with $20,000 IRA Withdrawal = $40,000 Provisional Income

$20,000 Social Security with $40,000 IRA Withdrawal = $50,000 Provisional Income

Tax Examples

The characters in this example are fictional only. Your actual experience will vary. This hypothetical example is shown for illustrative purposes only and is not guaranteed.

On The Return40k IRA 20k Social Security

20k IRA 40k Social Security

Taxable Social Security

Taxable Other income

Total Taxable Income

Minus Standard Deduction and Personal Exemptions

Net Taxable Income

Total Federal Income Tax

Table assumes Married Filing Jointly, 2020 tax brackets, Standard Deduction, plus additional deductions for over 65.

$11,100

$40,000

$51,100

$27,400

$23,700

$2,449

$4,000

$20,000

$24,000

$27,400

$0

$0

Medicare Excess Premiums – MFJ 2020 (per person)

Income Part B (Annual) Part D (Annual)0-$174,000 $1,735.20 Plan Cost Only

$174,001 - $218,000 $2,428.80 Plan + $146.40$218,001 - $272,000 $3,470.40 Plan + $378.00$272,001 - $326,000 $4,514.40 Plan + $608.40$326,001 - $750,000 $5,552.40 Plan + $840.00

$750,001 + $5,899,20 Plan + $916.80Premiums for 2020 are based on 2018 income levels

https://secure.ssa.gov/poms.nsf/lnx/0601101020

https://secure.ssa.gov/poms.nsf/lnx/0601101020

3.8% Net Investment Income Tax

Additional 3.8% Tax on The Lesser of:

Adjusted Gross income over: Net Investment Income:

• Capital Gains and Dividends

• Interest and Annuity Payments

• Passive Business Income

• Rents

$200,000

$250,000

http://www.irs.gov/taxtopics/tc559.html Accessed 8/25/16

PEP and Pease Eliminated in TCJA

Personal Exemption Phaseout (PEP)

Reduces Personal Exemption by 2% for each $2,500 over the above thresholds

Pease Limitation (Named after Congressman Pease)

Reduces Itemized Deductions by 3% of the amount of Adjusted Gross Income over the threshold up to 80% of the amount of most itemized deductions*

* Excluding Medical, investment interest, casualty and theft and gambling losses

$261,500

$313,800

Thresholds

GONE!

Alternative Minimum Tax

• Conceptually Simple: Flat tax of 26% to 28% of Income over a relatively high threshold, which was further increased by the act.

• Difficulty is in the calculation – Start with your 1040 AGI and then work backwards, adding back in deductions and adjusting for transactions that are treated differently for AMT than regular income tax.

• Only about 200,000 Taxpayers likely to pay AMT in 2018*

https://money.cnn.com/2018/01/18/pf/taxes/2018-amt-exemption-increase/index.html

EFFECTIVE MARGINAL TAX RATESHow much of your last dollar do you actually lose to Uncle Sam?

MFJ – Ordinary Income Tax Map - 2020

22% 24%

35%32%37%

10%12%



0%

15%

20%

MFJ – Long Term Gain and Dividend - 2020



Case Study – The Real Tax System

• John and Jane – Married Filing Jointly – 65+

• $60,000 combined Social Security

• $10,000 of Net Long-Term Capital Gains

• $52,000 Required Minimum Distributions

The “Real” Tax System: Ordinary Income

22.2%

49.95%

22%18.5%

24%

https://www.ssa.gov/planners/taxes.html https://www.irs.gov/pub/irs-drop/rp-19-44.pdf


49.95%? How did that happen?What Intuitively Should Happen: $1,000 additional IRA Withdrawal $120 What Actually Happens: $1,000 additional IRA Withdrawal 12% Bracket $120 Causes $850 Taxable SS 12% Bracket $102 Causes $1,850 Capital Gains to be taxable 15% Bracket $277.50

Total Additional Tax Burden on $1,000 withdrawal: $499.50

The “Real” Tax System: Capital Gains

10.3%

15%

38%

Tools for Tax Control

• Diversify among Account Types • IRA • Roth including Roth Conversions • Non-Qualified (Taxable)

• Use Tax Deferred Products where appropriate

• Properly Blend Withdrawals from different accounts

• Consider which assets should be held in which account type

39

Agenda

Individual Benefits

Spousal Benefits

Social Security Maximization

Strategies

Session Two – Understanding Social Security

40

Individual Benefits

Social Security

Source: Form SSA-7005-SSM-SI.

The law governing benefits may change

because, by 2034, the payroll taxes collected will be enough to pay

only about 77 percent of scheduled benefits.

“Social Security benefits are not intended to be your only source of income when you retire. On average, Social Security will replace about 40 percent of your annual pre-retirement earnings. You will need other savings, investments, pensions, or retirement accounts to live comfortably when you retire.”*

SL 0014-2 01/2018

• Higher Payroll Tax • Higher Taxable Wage Base • Higher Retirement Age • Means Testing • Recalculating COLA • Raise Earliest Eligibility Age • Base Benefits on Highest 40

years of Earnings

Proposed Changes

How Are Benefits Determined?

Source: “How You Earn Credits”, SSA Publication No. 05-10072, ICN 467510; January 2017

Becoming eligible: ▪ 40 quarters (10 years) of wages

that were subject to Social Security payroll taxes

▪ Quarters do not need to be consecutive

▪ Quarters do not expire and will remain on Social Security record

Benefits calculated based on: • Average of the 35 highest years

of earnings

If you have less than 35 years of work history:

▪ $0 is used in calculation for any year (up to 35 years) where you have no earnings

▪ Your benefit will be lower

Date of Birth Full Retirement AgeWhen is Full Retirement Age (FRA)?

Source: Social Security Administration - Retirement Planner: Benefits by Year of Birth (https://www.ssa.gov/planners/retire/agereduction.html), accessed January 2018

671960 and later

66 and 10 months1959

66 and 8 months1958

66 and 6 months1957

66 and 4 months1956

66 and 2 months1955

661943-1954

62

63

64

65

Taking Benefits Early

66

Age

25% reduction

20% reduction

13.3% reduction

6.7% reduction

Full benefits

FRA 66

62

63

64

65

66

Age

30% reduction

25% reduction

20% reduction

13.3% reduction

6.7% reduction

Full benefits

FRA 67

67

Source: Social Security Administration - Retirement Planner: Benefits by Year of Birth (https://www.ssa.gov/planners/retire/agereduction.html), accessed January 2018

Taking Benefits and Working

Under Full Retirement Age (FRA)

In the Year Full Retirement Age (FRA) is Reached

Full Retirement Age (FRA)

Give up $1 in benefits for every $2 earned above a $18,240 limit

Give up $1 in benefits for every $3 earned above a $48,600 limit

No penalty

Still working, earns $25,000 per year ▪ $7,960 over the earnings threshold ▪ Will give up $3,980 of benefits

▪ Receives only $8,020 in benefits this year

At Full Retirement Age, there is no longer any benefit reduction

John is age 62 with a $12,000 annual benefit

Working While Collecting Social Security

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. .

The Benefit of Delaying PaymentsIncrease in Benefits: Full Retirement Age (FRA) of 66 & 67

Source: Social Security Administration, Retirement Planner: Delayed Retirement Credits (www.ssa.gov/planners/retire/delayret.html), accessed January 2018

67

68

69

70

Age

8% increase 16% increase 24% increase 32% increase

FRA 66

68

69

Age

8% increase 16% increase 24% increase

FRA 67

70

The Benefit of Delaying Payments

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. Assumes a full retirement age benefit of $24,000 a year, an annual cost of living adjust of 3%, and the client living to age 95.

Breakeven Points:

Age 66 vs. 62: Age 76

Age 70 vs. 62: Age 79

Age 70 vs. 66: Age 81

• Provisional income includes**: • ½ Social Security benefits • Income from municipal bonds • Wages • Business income • Interest • Capital gains • Dividends • Traditional IRA distributions • Rental income

• Provisional income does not include**: • Tax-deferred build-up inside IRAs,

401(k)s and annuities • Income from Roth IRAs • Non-taxable income from life insurance

Taxation of Social Security Benefits

* www.ssa.gov/planners/taxes.html, "Benefits Planner: Income Taxes and Your Social Security Benefits", accessed October 2017 ** IRS Form 1040 Instructions 2016 Prudential Annuities, its distributors and representatives do not provide tax, accounting, or legal advice. Please consult your own attorney or accountant.

Taxation of benefits depends on your provisional income*:

Married Filing Jointly ▪ $32,000 = SS not taxable ▪ $32,000 - $44,000 = up to 50% taxable ▪ Above $44,000 = up to 85% taxable

• Single or Head of Household ▪ $25,000 = SS not taxable ▪ $25,000 - $34,000 = up to 50% taxable ▪ Above $34,000 = up to 85% taxable

50

Spousal Benefits

Spousal Benefits

Source: “Retirement Benefits”; SSA Publication No. 05-10035, ICN 457500; June 2017

▪ Personal earnings record, or

▪ Spouse’s earnings record

Married individuals can claim Social Security benefits based on

▪ Spousal benefit is up to 50% of their spouse’s Social Security benefit

▪ Cannot claim spousal benefit until the spouse files for benefits

If electing based on spouse’s earnings record

• Lower-earning spouse files for benefits before Full Retirement Age

• Own benefit reduced • Spousal benefit reduced as well

Taking Spousal Benefits Early

Source: Social Security Administration, Benefits for Spouses (https://www.ssa.gov/oact/quickcalc/spouse.html), accessed January 2018

62

63

64

65

66

Age

35% spousal benefit

37.5% spousal benefit



50% spousal benefit

FRA 66

62

63

64

65

66

Age


35% spousal benefit




50% spousal benefit

FRA 67

67

https://www.ssa.gov/oact/quickcalc/spouse.html

▪

▪ Survivor benefits reduced if received before full retirement age – up to 28.5%

▪ Exceptions for widows and widowers with children who are under 16

Survivor benefits generally begin at age 60

Survivor Benefits

▪ Advantageous if greater when full retirement age is reached

Survivor can switch to his or her own benefits

A surviving spouse can receive or step up to the benefit of the deceased spouse

If survivor is full retirement age, 100% of spouse’s benefit

Source: “Survivor Benefits”; SSA Publication No. 05-10084, ICN 468540; June 2017

Spousal Benefits - Examples ▪ Gary & Amy – married; both age 62 ▪ Gary’s full retirement age benefit: $2,000/month ▪ Amy has no earnings history ▪ A spouse is entitled to the greater of his/her own

benefit, or up to 50% of his/her spouse’s full retirement age benefit depending on the age the claim is made

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information.

Spousal Benefits - Example # 1

▪Gary’s reduced benefit: $1,500/month

▪Amy’s spousal benefit at 62: $700/month

Both file early at age 62

▪ Survivor benefit: $1,650/month*

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. * If decedent made an early claim for benefits, survivor benefits claimed at or after survivor’s FRA will not be less than 82.5% of decedent’s PIA


▪Gary’s FRA benefit: $2,000/month

▪Amy’s spousal benefit: $1,000/month

Both file at age 66 (Full Retirement Age)

▪ Survivor benefit: $2,000/month



▪Gary’s benefit at age 70: $2,640/month

▪Amy’s spousal benefit: $1,000/month

Both file at age 70

▪ Survivor benefit: $2,640/month


Spousal Benefits

$876,960

$852,000

$745,800

Total Payout:

Claim at 62▪ $414,000 Gary’s benefit ▪ $193,200 Amy’s spousal ▪ $138,600 Amy’s survivor

Claim at FRA▪ $456,000 Gary’s benefit ▪ $228,000 Amy’s spousal ▪ $168,000 Amy’s survivor

Claim at 70▪ $475,200 Gary’s benefit ▪ $180,000 Amy’s spousal ▪ $221,760 Amy’s survivor

Assume Gary Passes Away at 85; Amy at 92

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. Assumes death at ages 85 and 92. As the specifics for your situation may be different, please go to ssa.gov for more information.

• Government Pension Offset • Affects spousal/survivor benefits if the spouse/survivor has a government pension • 2/3 of what is received from government pensions will be subtracted from Social

Security benefits

• Windfall Elimination Provision • If an individual is entitled to a Social Security retirement benefit and works for, or has

worked for, an employer who does not withhold Social Security taxes from their salary (such as a government agency), their Social Security “Primary Insurance Amount,” or PIA (the benefit they would receive if they elect to begin receiving retirement benefits at their normal retirement age), may be subject to a reduction. Generally, the reduction would be the lesser of : • 50% of the non-Social Security pension, or • $480.00 (in 2020)

• Pension from an employer where Social Security taxes were paid is not taken into consideration

Social Security and Other Pension Benefits

Collecting Benefits from a Divorced Spouse

Survivor benefits: ▪ Marriage lasted at least 10 years ▪ At least age 60 or older ▪ Cannot remarry until over age 60

Source: “What Every Woman Should Know”, SSA Publication No. 05-10127 ICN 480067; June 2017

Spousal benefits: ▪ Marriage lasted at least 10 years ▪ Cannot be remarried ▪ Ex-spouse is entitled to

Social Security

Spousal benefits

Survivor benefits

61

Strategies to Maximize Social Security Benefits

▪ Changes to Strategies ▪ Restricted Application Strategy ▪ Strategies for Widows/Widowers

• The Bipartisan Budget Act, signed into law late in 2015, has dramatically changed the landscape of Social Security planning

• The law directly impacted two powerful claiming strategies:

1. Restricted Application 2. File and Suspend

• The Restricted Application remains available to anyone who has attained the age of 62 before December 31, 2015

• The File and Suspend strategy is no longer available. However, those who have already filed and suspended their benefits prior to April 30, 2016 will not be impacted

Changes to Strategies

Source: The Bipartisan Budget Act of 2015, Pub. L. 114-74

• Option 1: Meghan files and Adam waits

Social Security Maximization StrategiesRestricted Application Case Study

▪ Adam receives $2,640 per month / $31,680 per year for 15 years

▪ She receives $1,500 per month / $18,000 per year for 19 years ▪ Survivor benefits of $2,640 month / $31,680 per year for 7 years

Meghan files for benefits at age 66

Adam files in four years at age 70

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. Assumes death at ages 85 and 92.

• Option 2: Adam files a Restricted Application*


▪ Entitled to 50% of Meghan’s benefit

▪ In the first four years he receives $750 per month / $9,000 per year

▪ At age 70, he switches to his own benefit

▪ Over the next 15 years, he receives $2,640 per month / $31,680 per year

Meghan files at 66, her benefits are unaffected

At age 66, Adam files a Restricted Application*


* Under §831(a) of the Bipartisan Budget Act of 2015, Pub. L. 114-74, Social Security claimants born after 12-31-1953 will no longer be able to restrict claims exclusively to spousal benefits. Those born before 1-1-1954 will retain the right to file a restricted application.

Adam Uses Restricted Application ▪ $36,000 of spousal benefits ▪ $475,200 of his benefits ▪ $342,000 of her benefits ▪ $221,760 of survivor benefits

$1,074,960

Total Payout:

$1,038,960


Meghan Files At 66 / Adam Files At 70 ▪ $475,200 of his benefits ▪ $342,000 of her benefits ▪ $221,760 of survivor benefits


• Increases benefits for couples with their own earnings history who may be retiring at different ages

• Things to remember: • Individuals can collect spousal benefits and allow their personal

earnings history benefits to receive delayed retirement credits • Individuals cannot collect benefits on their spouse’s earnings

history until their spouse files for benefits • Only claims filed by individuals who have reached full retirement

age and who were born before 1-1-1954 may be restricted to a spousal claim

• Claims filed by individuals born after 12-31-1953 are deemed to be claims for both personal and spousal benefits


Social Security Maximization Strategies Options for widows and widowers

This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. Assumes death at age 92.

Age

Wendy’s own Social Security benefit: At age 62: $1,500 At age 66: $2,000 At age 70: $2,640

92

Wendy lives to age 92

60

Wendy, age 60

66

Husband passed away this year when he was age 66 with $2,400 benefit Wendy’s survivor Social Security benefit:

At age 60: $1,716 At age 66: $2,400 At age 70: $2,400

Receive $1,716 per month beginning at age 60



Begin Survivor Benefits Immediately

Strategy

#1

Taking her own benefit at 62 did not affect her ability to receive a full survivor benefit at age 66

At age 66 her benefit becomes $2,400 per month

At age 66 switch to her survivor benefit




Begin Her Own Benefits at Age 62

Strategy

#2


This is a hypothetical example of the Social Security benefits that could be received from the government and is for illustrative purposes only. As the specifics for your situation may be different, please go to ssa.gov for more information. Assumes death at age 92

Taking a reduced survivor benefit did not affect her ability to take her own benefit at a later age

At age 70 her benefit becomes $2,640 per month

At age 70 switch to her own benefit


Begin Survivor Benefits Immediately

Strategy

#3



$902,880

$820,800

$658,944

Total Payout:

Survivor benefits only ▪ $658,944 of survivor benefits

Her benefit at 62 then survivor benefit at age 66

▪ $72,000 of her own benefits ▪ $748,800 of survivor benefits

Survivor benefit at age 60 then her benefit at age 70

▪ $205,920 of survivor benefits ▪ $696,960 of her own benefits

Changes to Social Security under §831 of the Bipartisan Budget Act of 2015 have added increased urgency to all discussions of Social Security maximization. • Monitor Social Security statements

• Statements are now available online. Go to socialsecurity.gov to create a secure user account to view statements

• Evaluate the impact of commencement dates on retirement plans • Be aware of the Restricted Application and survivor strategies • Work with a Financial Professional to review income sources and

evaluate if a variable annuity can help fill any income gaps in retirement

Key Points on Social Security Strategies

Tax Management Strategies

Charitable Contributions

• Qualified Charitable Distribution (QCD) • Made ‘permanent’ in 2017 • Available to those 70 ½ or older (even if you don’t have

an RMD yet!) • Distribution direct from IRA to organization • Avoids amount entering income completely

• Donor-advised funds (DAF) • Contribute larger amounts designated to charity to the

fund, and receive the full tax deduction benefit in that year

• Funds are able to appreciate in the DAF until distributed • Retain control of where and when funds are distributed

Charitable Contributions Continued

• Gifting appreciated securities • Shares directly transferred to organization • Org. can sell shares for full value with no taxes due • Can be a better option than selling the securities

yourself to make a donation • Some even consider this to be a better option than

the QCD

Qualified Longevity Annuity Contract

• QLAC allows retirees to put away funds which are no longer considered in RMD calculations

• Up to 25% of total IRA balance to a maximum of $130,000 can be contributed

• Distributions can be delayed until age 85 • Taxes are due on income

• Ultimately more of an RMD-delay than RMD avoidance

• Some contracts allow death benefit and cash refund options for beneficiaries

Stretch IRAs

• The Stretch IRA is only for people who do not need their entire Traditional IRA for their living expenses during retirement

• This strategy is based on taking lowest amount of money from the IRA account that is allowed by law, at the latest time allowed, without penalty

• This strategy has been removed by the SECURE act for new inherited IRAs, but remains for existing inherited accounts

• New inherited IRAs must be liquidated over 10 years, with no minimum in any given year

Stretch IRAs

In our example: • John has a $100,000 Traditional IRA account that is

not needed for retirement • Assume a 6% annual rate of return on the IRA

account1 • John & Cheryl were both born on 06/01/1952 (which

makes them 65 years old on 12/31/2017) • Their daughter was born on 08/07/1983 (which

makes her 34 years old on 12/31/2017)

Stretch IRAs

Assumptions: 6% annual rate of return. This illustration is hypothetical and does not represent the performance of any investment product. Distributions taken at the end of each year. Projected values should be reduced for any applicable federal and state income taxes that will be due. This illustration is based on current tax laws which may change in the future.

Total projected distributions during owner's lifetime: $15,522.07 Total projected distributions during surviving spouse's lifetime: $25,243.19 Total projected distributions during surviving spouse's beneficiary's lifetime: $598,105.17 Total projected distributions: $638,870.43

Roth Conversions

Year 10 Values, 15% Bracket

This illustration assumes consumer is over age 59 1/2 and will not incur a 10% early withdrawal penalty when using IRA funds to pay taxes on the conversion. This illustration is intended to show only the income tax implications of Roth IRA conversions and does not represent any specific investment. Returns are compounded annually at the end of the period.

Roth Conversions



Bracket Maximization

• Use years post-retirement and pre-RMD to your advantage! Maximize your brackets.

• Fill lower tax brackets with IRA distributions even if not needed

• Reinvest the proceeds to continue growth • Doing so reduces future RMDs, and allows

flexibility of income • Using proceeds to fund partial Roth

conversions can enhance the benefit!

Capital Gains Effects

• Be aware of taxation on non-retirement assets!

• Maintaining large non-qualified accounts may not be to your best benefit

• Consider the turnover ratio of your investments • Fixed income funds often have a much higher

internal turnover than equity funds, further reducing their returns

• Municipal bonds and funds that hold them are federally tax exempt and state tax exempt for the state of residence

Annuity Solutions

• Non-qualified annuities can add tax-deferral to monies that would otherwise be taxed significantly

• Be aware of internal annuity fees • Consider fixed annuities as a replacement for

CDs • Some annuities can have significant benefits for

RMD management in qualified accounts

Tax Lot Harvesting

• This is the concept of harvesting gains and losses from securities to meet a certain goal

• Losses or gains could be harvested, and are often done to even out any capital gains liability

• Some active accounts will do this automatically

Net Unrealized Appreciation

• Applicable to company stock held within a 401(k) • Allows to withdraw the stock and pay income taxes

on only the cost basis! • When stock is sold in future, capital gains taxes are

paid on the gain • Not always the best option, but can be very

beneficial if funds are needed within a few years

Summary

• Many options are available for tax management in retirement!

• Make sure you have a thoughtful discussion with your financial advisor and tax advocate (be aware that most CPAs are not truly your tax advocate)

• Proper management can be a significant benefit without increasing investment risk

taxes in retirement and social security · 2021. 2. 5. · 40k ira 20k social security 20k ira 40k...

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