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Financial Planning

Mar 30

How to Survive, Financially, During the Pandemic

By Cash Flow Planning, Financial Planning

Last week Congress passed, and the President signed, a $2 trillion bill to provide relief to American taxpayers and businesses suffering from the economic effects of the Coronavirus pandemic. They named it the “Cares Act.”

Media reports have focused on the $1,200 checks that individual taxpayers will receive. For most who live in major metro areas with high costs of living, this $1,200 will not provide much real relief – especially as our time spent in quarantine extends from several weeks into several months.

There are, however, other elements in the bill that allow you to draw substantial amounts of cash from your retirement savings to pay bills and stay afloat in 2020. First, you can now borrow two times as much from your 401(k). Second, the 10% penalty normally applied to early withdrawls from IRAs and retirement plans will be waived.

Borrowing from your 401(k)

Borrowing from your current employer’s 401(k) plan when your finances have taken a turn for the worst has always been an option. It’s quicker and easier than securing a loan from a bank, has no impact on your taxes or credit score, and is less expensive than maxing out on your credit cards. Yes, you’re paying some amount of interest on the loan, but you’re paying it to yourself. And you have five years to repay the loan.

Previously, you were only allowed to borrow the lesser of $50,000 or 50% of your vested balance. Now, you can borrow the lesser of $100,000 or 100% of your vested balance and you have an additional year (six total) to pay back the loan.

Taking early withdrawls from your IRA

Taking money from your IRA “early” – meaning before you turn 59.5 years old – has always been an option. Unless you met certain hardship tests, a 10% penalty was levied on your withdrawl and the full amount of that withdrawl was included in your taxable income. And you could not simply replace the funds you withdrew. You were limited by the annual contribution limits to IRAs ($6,000 + $1,000 if 50+).

Now, the 10% penalty will be waived on withdrawls up to $100,000 taken anytime through December 31, 2020. The withdrawl will be included in your taxable income, but you will be able to stretch that over three years and you can redeposit 100% of the funds withdrawn over three years. What’s more, if you redeposit the funds, you can file an amended tax return and get back the income tax you paid on the withdrawal.

That $100k withdrawl limit can be extended in certain circumstances. If you have been laid off and are paying health insurance premiums yourself while unemployed, any dollars withdrawn to cover those premiums are considered a “hardship withdrawl” and were already exempt from the 10% penalty.

Feb 27

So You Inherited an IRA. Now what?

By Financial Planning, Retirement, Widows and Money

Wealth Management: Putting Your Interests First

Or a 401(k), or a SIMPLE IRA or a SEP IRA….

It depends first on your relationship to the account’s original owner – were they your husband or wife? The IRS has one set of rules for spouses who inherit retirement accounts and another set for everyone else.

Next, it matters how contributions were made into the account. Were pre-tax dollars used, as with a traditional IRA, 401(k), SEP or SIMPLE IRA? Or were after-tax funds used, as with a Roth IRA or Roth 401(k)?

Lastly, to the extent you have options, ask yourself whether you need the funds you’ve inherited, and, if so, when.

OPTIONS WHEN YOU’VE INHERITED AN IRA FROM YOUR LATE SPOUSE

DO YOU NEED THE MONEY NOW?

If so, you can take a lump sum distribution and there will be no penalties if you are under 59.5 years old. In the case of a Traditional IRA, the entire distribution will be considered taxable income to you. For a Roth IRA, because taxes were paid on the dollars originally contributed, only the portion of the distribution that represents earnings (or growth, inside the account) will be taxable income. Depending on the size of the inherited account and your other income, taking a lump sum distribution could result in a large tax bill that year, so be cautious and consult your tax professional before doing anything.

An alternative for those needing to access the inherited funds in the near term is to make withdrawls over five years. To do this, you set up an Inherited IRA in your name and transfer the funds from your late spouse’s IRA into the new Inherited IRA and tell the IRS that you have elected to take distributions using the five-year method. You can choose how much to withdraw each year, but must exhaust the account by December 31st of the fifth year after the year of your spouse’s passing. This can be done with both Traditional and Roth IRAs and there will be no penalties on distributions if you are under 59.5 years old. One caveat is that you will not be able to make any contributions to that Inherited IRA over those five years.

DON’T NEED THE MONEY NOW?

 You have two choices – transfer the funds into an account you own (a “spousal transfer“) or into an Inherited IRA in your name. The rules regarding future contributions and required minimum distributions differ significantly, so let’s compare and contrast the two options.

SPOUSAL TRANSFERS

First, know that spousal transfers are an option for surviving spouses only when they are the sole beneficiary of their late spouse’s account.

Now, after inheriting a Traditional IRA you can treat the funds as if they were your own and roll them into your own IRA account in a spousal transfer. You can make contributions to the account in future years if you have earned income. The funds are available for distribution anytime, but will be subject to a 10% penalty if you are under 59.5 years old and do not meet any of the IRS’s hardship exemptions. If your late spouse was already taking their required minimum distributions (RMDs), you must take the RMD for the year of their death. Going forward, no further RMDs will be required until you yourself reach 72 years old and those RMDs will be based on your age, not your late spouse’s.

After inheriting a Roth IRA you can also do a spousal transfer into your own Roth IRA. You can withdraw dollars that represent contributions anytime, penalty and tax free. You can withdraw dollars that represent earnings – or growth inside the account – penalty and tax free if you are at least 59.5 years old and five years have passed since your spouse’s Roth account was opened. Because the dollars used to fund a Roth IRA have already been taxed, there are no requirements for RMDs in Roth IRAs, even when they’ve been inherited.

INHERITED IRA ACCOUNTS

If you are not the sole beneficiary of your late spouse’s IRA, you may open an Inherited IRA in your name and roll the funds from your late spouse’s account into your Inherited IRA. Going forward, you can take distributions but cannot make contributions (ever).

If the IRA you inherited is a Traditional IRA, you can take distributions anytime and penalty-free if you’re younger than 59.5 years old. If your late spouse was taking required minimum distributions (RMDs), you must take his/her RMD in the year of their death. Thereafter, RMDs will kick in when you are 72 years old and be based on your age, not your late spouse’s.

If you’ve inherited a Roth IRA, you can withdraw dollars that represent contributions anytime penalty and tax-free. You can withdraw earnings – or growth inside the account – penalty-free regardless of your age. Withdrawls of earnings will also be tax-free so long as the account has been open for at least five years. The IRS does require minimum distributions or RMDs starting the later of (1) December 31st of the year following the year of your spouse’s death; or, (2) the date your late spouse would have turned 72.

WHAT IF I INHERITED AN IRA FROM A PARENT, SIBLING OR FRIEND?

It used to be a little complicated, but thanks to passage of the SECURE Act into law in December 2019, it’s now quite simple. Now, when you inherit an IRA or other retirement account – whether Traditional or Roth – you must take distributions of all funds in that account by December 31st of the tenth year following the death of the original account owner.[1]Distributions from Traditional IRAs will be taxable income to you and thus can create a sizable tax bill, depending on your other sources of income. Thankfully, the IRS gives you the freedom to decide how much to withdraw in each of those ten years, so you can work with your tax professional to come up with a strategy to minimize the taxes you’ll have to pay.

[1]There are some exceptions, namely, if the non-spouse beneficiary is a minor child, disabled or chronically ill or is less than ten years younger than the original account owner.

Nov 05

Financial Aid Strategy for Small Business Owners

By College Planning, Financial Planning

If you own a small business with fewer than 100 employees, here is something to consider to improve your eligibility for financial aid. Public universities use the FAFSA to collect information about your income and personal, non-retirement assets. They place a zero value on family businesses that employ fewer than 100 people. Don’t be offended – this is actually a good thing!

The FAFSA will ask for your income for the prior two calendar years, as reported on your 1040. They will ask you for the value of your various personal, non-retirement assets – checking, savings accounts and brokerage accounts – on the date the FAFSA is filed (generally, the autumn of your student’s senior year of high school). Small business owners can take advantage of these facts to loan their small businesses money from their personal accounts prior to completing the FAFSA to remove those dollars from the FAFSA, lower their family’s Expected Family Contribution and raise their eligibility for financial aid.

Oct 16

Social Security Provides Benefits for Older Widows Too

By Cash Flow Planning, Financial Planning, Social Security, Widows and Money

Widows 60 or older (50 if disabled) are entitled to receive survivors’ benefits from Social Security based on their late husband’s work record. This includes divorced women whose ex-husbands have died if they were married to the deceased for 10+ years and did not remarry before the age of 60.

These widows receive 71.5% – 100% of what their late husband would have collected at his full retirement age (“FRA”), which is 66 plus some number of months for those born 1945-1959, and 67 for those born in 1960 and later. The exact percentage of their late husband’s benefit that they will receive as widows depends on the widow’s age and how close she is to her own full retirement age. If she has reached her own FRA, she’ll receive 100% of what her late husband would have received at his FRA. The further away she is from her own FRA, the lower the percentage.

What could this mean, in dollar terms?

Currently, the average Social Security benefit is $1,461 per month, while the maximum benefit for someone who’s reached his FRA is $2,861. Thus a widow could receive something in the range of $1,045 to $2,861 per month in survivors’ benefits. This can provide valuable support while a widow is in transition.

That said, there are a couple of things to think about.

First, for women who work and who have not reached their own FRA(1), these widow’s benefits will be taxed at $1 for every $2 of income they earns above $17,640 (2019). For those who have reached their FRA, their widow’s benefits will not be reduced by any income earned from work.

Second, collecting survivors’ benefits will not impact the retirement benefits a woman can claim on her own work record or that of her late husband.

Third, once she is 62 and can collect her own retirement benefit, a woman cannot collect both a survivor’s benefit and a retirement benefit. Social Security will pay only one benefit, and will pay whichever is the higher of the two.

It’s important for widows to file for survivors’ benefits as soon as possible. The Social Security Administration will pay claims retroactively to the date of the filing, but not the date of death.

(1)66 plus some number of months for those born 1995-1959, and 67 for those born in 1960 and later

Oct 12

Social Security “Survivors Benefits” for Widows and Children

By Cash Flow Planning, Financial Planning, Social Security, Widows and Money

Did you know that Social Security provides “survivor benefits” to widows and their children?

Widows can receive benefits, for themselves, if they are caring for a child under 16 or a child of any age who is permanently disabled. Each child under 18(1) can also receive a monthly check for him/herself, payable to the parent. The benefits paid to the widow and her child will each be equal to 75% of what the deceased father would have received at 67, his full retirement age (“FRA”).(2)

So, what could this look like, in dollar terms?

Currently, the average Social Security benefit is $1,461 per month, while the maximum benefit for someone who’s reached his FRA is $2,861. Thus a widow and her child could together receive something in the range of $2,100 to $4,300 per month in survivors’ benefits.

There are some limitations, however.

For widows who work outside of the home, their own widow’s benefit will be reduced by $1 for every $2 earned above $17,640 annually (2019). Since most women earn well above this threshold, the value of the widow’s own benefit is quickly lost.

That said, no matter a widow’s income, filing for the children’s benefit is a no-brainer. It’s found money. These benefits will continue for each child until s/he reaches 18(1) and will rarely be taxed.(3)

There is a maximum benefit that a family can receive, meaning that your combined benefit, widow’s plus children, is capped at 150-180% of the benefit the deceased father would have received at his FRA.

It’s important for widows to know that collecting survivors benefits now will not impact the amount you will ultimately collect in retirement benefits down the road – whether you plan to collect those retirement benefits on your deceased spouse’s earnings record or your own.

Widows must file for benefits in person at their local Social Security Administration office and should do so soon after their husband’s death. Once the application is processed, the Social Security Administration will pay benefits retroactive to the date the application was filed, not to the date of their husband’s death.

Social Security survivors benefits will not likely replace 100% of a late husband’s income, but they can provide valuable support in a widows transition.

(1)Or up 19 years, 2 months if still in high school full time

(2)67 for those born in 1960 or later

(3)The children’s benefits are only taxed if the children themselves have significant income – about $25k – from other sources

Oct 02

How Social Security Works

By Financial Planning, Retirement, Social Security

We’ve been paying into Social Security from the time we earned our first paychecks as teens or twentysomethings. But what can we expect to get back when we retire ten, fifteen or twenty years from now?

“Nothing!” you cry.

Yeah, yeah, the system needs fixing to stay solvent, but I’m confident that the politicians will come up with a solution for two reasons. Seniors care about Social Security. And seniors always vote.

Right now, the government collects 12.4% of the first $132,900 of our income with half (6.2%) coming out of our paychecks and the other half coming from the employer. (The self-employed pay both halves, but can deduct the “employer half” from their income to level the field with corporate employees.) Because the amount of our income that is taxed for Social Security is limited, the amount of Social Security benefits we can receive in retirement is capped.

The exact amount you or I will receive in retirement depends on two factors. The first is our individual earning history. Social Security will use a worker’s highest 35 years of earnings to calculate the amount she receives monthly in retirement. The second is at what age we elect to collect benefits. For those of us born in 1960 or later, we will receive 100% of what we have earned, from Social Security, if we collect benefits at age 67 – our “Full Retirement Age” or FRA. We can elect to receive benefits as early as 62, but our benefits will be reduced.

Collecting at age… Benefits reduced by…
62 30%
63 25%
64 20%
65 13%
66 7%

We can also delay collecting Social Security benefits past 67 and receive more in monthly benefits as a result.

Collecting at age… Benefits raised by…
68 8%
69 16%
70 24%

For many of us, our earnings history will be what it will be. Years when we stayed out of the official workforce to raise children or take care of aging parents will get factored in as zero earnings years and reduce our ultimate Social Security benefits. Decisions about when to start collecting benefits on our own work record or that of a spouse are complex and deserve careful consideration. Delaying claiming will let your ultimate Social Security benefit grow, yes, but if you are relying on savings to pay the bills until claiming, you may be putting your financial security in retirement at too much risk. This is where a CFP® professional can help guide you towards the right decision.

Sep 09

The Instant My Mom’s World Was Upended

By About Eileen, Financial Planning, My Why

“Mrs. McPeake, we believe your husband has died of a heart attack.”

These words were the first the doctor had spoken. These were the first words anyone had spoken to me or my Mom since the police officers had picked us up at our home and driven us to the ER. Along the way, we’d passed the scene of the accident. I could see my father’s car smashed up against a tree on the side of the road.

It was 1978. I was nine. My Mom and I were sitting inside a tiny, windowless room at the hospital. I didn’t want to hear any more and bolted out of the room and into the hallway. Clutching my beloved Pooh Bear, I rocked back and forth on a hard plastic chair mumbling “he didn’t say died” over and over.

But it was true. And my and my mother’s lives were forever changed.

I got up the courage to return to the tiny, windowless room after the doctor had left. I sat down next to my Mom, who was just staring blankly ahead. I hugged her and asked, “Are you going to get remarried?”

Looking back, I’m deeply embarrassed that these were my first words to her, but to be fair, I knew that my father was the breadwinner while my mom stayed at home with me.

My parents had both grown up in working class families in the 1940’s and 1950’s. Families where the month always lasted longer than the money. My mom was the oldest of six. She was Valedictorian of her high school and dreamed of going to college, but instead went to work as a secretary to help provide for her younger brothers and sisters. My father had been the youngest of four. His own father had died when my dad was a toddler and his mother had worked in the textile mills of southern New England to support her family. My father put himself through college, studied Electrical Engineering and started a career in management of technology companies. Together, my parents were able to buy a house in the suburbs, put two cars in the garage, give me a room filled with all the toys I could want and build a solid upper middle class life for our family.

But now, all of the financial security that she and my father had finally come to enjoy was gone.

What was going to happen to us?

That’s exactly the question my mother was asking herself.

What would she do for income? She hadn’t worked in nearly ten years, and, then, as a secretary. She could never match my father’s c-suite earnings….How drastically could she reduce our expenses? We had just upgraded to a five bedroom home in a nicer suburb….What about health insurance? This was 1978 and there was no COBRA protection. My father’s company-issued policy would expire at the end of the month….

Over the years, I watched as concerns about money consumed my mother. It was quite understandable in the first six years when we were subsisting on Social Security Survivors’ benefits and she put herself through college and then law school. They persisted, however, even after she embarked on a successful legal career. So often she said “no” to herself, when she could have said “yes.” Yes, I can afford a new TV. Yes, I can afford a vacation.

She never found the person who could help her answer the questions that kept her up at night. A professional to work with her to build a financial plan and regain some of the security she’d lost when my dad died.

This is the reason I’ve become a financial planner. I help women, like my mother, who are going through profound life transitions. Some have recently been widowed while others are newly divorced. Still others have been flying solo for some time but seek to retire or otherwise change course in a profound way. For these women, I build financial plans that help them regain financial security and allow them to say “yes” to themselves.

Dec 14

What does a “personal financial plan” really look like? (And why should I pay a professional to craft one?)

By College Planning, Financial Planning, Retirement

It’s a question I get asked often.  After all, there are plenty of online calculators out there. They’ll take some basic inputs about your big picture goals – like private college for your child or retiring at 60 – and spit out a number for how much you should be saving every year. They’re easy to use – and free!

My answer? The reason those tools are easy to use is because they make so many simplifying assumptions.  And we all know that real life is always little more complicated…. Financial planning – when done thoughtfully and rigorously – creates a detailed, customized map to help you navigate your way to where you want to go.

Your plan should include a detailed analysis of your income streams and expenses, now and in the coming years. It should allow for the running of different scenarios around big decisions that you control, like

  • sending your child to an in-state university or more expensive private college;
  • plowing some of your savings into that dreamed-of vacation home;
  • retiring early to travel or pursue other hobbies; and/or
  • electing to take your Social Security benefits earlier v. later.

Your plan must also take into account what you cannot control, namely the potential pitfalls along the way – like stock market downturns, unexpected medical diagnoses and runaway inflation – and help you steer your way through them.

A financial planner worth their salt knows how to ask the right questions to help enunciate your goals and prepare a plan that shows you how you can achieve them.

What does such a plan cost, you ask?  Well, it depends. At McPeake & Company, we are happy to discuss your current situation and future goals in a free hour-long consultation. Following that, we’ll prepare a detailed proposal and cost estimate for you. If you decide to move forward with us, we’ll get to work!