You Gave the Money to the Wrong Person

FAMILY UPDATE

Last week, I complained that my pets follow my wife around like they are in a parade and ignore me. One of my faithful readers gave me a great suggestion: be the one that feeds them. I've been trying it, and it's working! I got two puppy cuddles last week.

My middle son, Alex, won last weekend's 1600-meter race in track. Luckily my wife, Dalanee, is athletic. They certainly didn't get it from me.

My oldest son and I are trying out (what we call) "basic dude stuff." Last weekend we tried shooting a bow and arrow. The target was a pillow but we imagined it to be a zombie.

A tremendous amount of confusion and misinformation surrounds your beneficiary and leaving moo-lah to your heirs.

It’s time for: Dave’s Quick and Easy (and Important) Guide to Understanding Beneficiary Arrangements.

It is essential that your beneficiary arrangements match your desires, and today I am going to dispel some common misconceptions. Get ready to learn.

Retirement Accounts

On any sort of retirement account (IRA, 401k, Roth IRA, etc.), you are able to name primary and contingent beneficiaries.

Example:

IRA Account Holder: Joey Jenkins

Primary Beneficiary: 100% going to Joan Jenkins (wife)

Contingent Beneficiaries: 50% going to Johnny Jenkins (son)

50% going to Jackie Jenkins (daughter)

If Joey (husband) were to die, Joan (wife) would take possession of the retirement account assets and directly roll over the money to her own retirement account. There is no taxation on this kind of transaction.

If Joey and Joan were to die in an accident, then Johnny (son) and Jackie (daughter) would each receive half of Joey’s retirement account.

Johnny and Jackie then have two options:

Option #1– Take the money in cash. With this option, Johnny and Jackie would be required to pay taxes on their full share of the inheritance.

So if Johnny (the son) were to receive his portion of $300,000, he would then be required to claim all of that money as income on his tax return for that year. He very well could pay $100,000 to Uncle Sam in federal income tax.

Option #2- Roll the money over into an Inherited IRA. This option would allow Joey to pay no taxes for now. As he pulls money out of the account over time, he must pay income taxes, based on his tax bracket, on whatever amount he withdraws.

An Inherited IRA is a great way to stretch out the tax liability, as the beneficiary has up to ten years to withdraw the money.

Also, the 10% tax penalty does not apply to an Inherited IRA (normally you need to be 59 ½ to withdraw money from retirement accounts without penalty).

Roth IRAs pass tax-free, there is no timetable for their withdrawal, and are tax-free when the money is withdrawn.

Important Notes

You can change primary and contingent beneficiaries at any time.

If you have a 401k, by law, your spouse must be the primary beneficiary (unless they sign a waiver). This is not the case with IRAs.

Beneficiary arrangements on retirement accounts supersede your last will and testament. This is essential to understand.

If your will instructs your IRA to go to your son, and your IRA account names your daughter as beneficiary- the daughter gets the money. It doesn’t matter what the will says. The beneficiary designation trumps the will.

Non-Retirement Accounts

Now let’s move on to non-retirement assets. These include cash, savings, brokerage accounts, stocks, bonds, or anything else you possess outside your 401k or IRA. Your home and other properties would also fall under this category.

These assets fall under completely different rules.

You can have a non-retirement account "held jointly." So if one person dies, the other automatically takes full control over the account.

You can also set up a Transfer Upon Death designation (commonly referred to as a TOD). So if Joey Jenkins has a savings account titled in his name, and his desire is for the account to transfer to his daughter upon his death, the account would look like this:

Owner: Joey Jenkins TOD Jackie Jenkins.

Important Notes

A TOD designation avoids probate. The money transfers to the beneficiary immediately upon your death. Jointly held accounts also avoid probate.

You can name more than one person on your TOD instructions. You can split up the beneficiaries just like a retirement account.

In Florida, while your home can be owned jointly, you cannot place a TOD on it or any other real estate.

Setting up a trust can accomplish the same things as mentioned above, but a TOD might be simpler in many situations.

Annuities held outside of retirement accounts require you to name a beneficiary. Therefore annuities operate in a very similar fashion to retirement accounts.

Life insurance also operates under beneficiary rules similar to retirement accounts.

Wow! That was some technical (and important) information.

This info can help you avoid probate and make sure the right people get the right money.

Throughout my career, I’ve seen outdated beneficiary instructions create messy situations. I’ve even seen spouses forget to take their ex-spouses off their accounts! Don’t let your ex get your 401k!

Be Blessed,

Dave

 

I Love Paying Taxes

FAMILY UPDATE

We have three cats and a dog, all devoted to my wife. When she walks around the house, there is a parade behind her. Why doesn't the dog like me like that? Why does she get all the cuddles and love? It's not fair. How do I get them to like me? My puppy will pay attention to me if I throw him a tennis ball but other than that he is lying by my wife's side.

I've always liked baking and I baked a couple of fruit pies this week. Using frozen cherries is a great way to make a delicious and healthy pie. Canned pie filling is pure sugar.

Below you will see the ugliest blueberry pie ever made (it was still gone in less than an hour).

Tax time is rolling around, which confuses many of my clients. There are a lot of daunting terminologies out there. I’m going to stick with the stuff you actually need to know.

1099-MISC: A “1099-MISC” is for work you did as an independent worker or freelancer.

1099-INT: This reports interest income you’ve received from savings/CD/money market accounts. It also includes any interest you receive from bonds outside a retirement account. This income is taxed at your federal income tax bracket.

1099-DIV: If you are receiving dividends from an account outside a retirement account you must pay taxes. These tax rates can be more favorable.

As an aside, most people believe the long-term capital gains rate to be 15 percent. The truth is that it is dependent on certain factors, which means it often is not 15 percent.

If you are married and show less than $83,350 in income, the tax rate for long-term capital gains is zero. If you add your social security, IRA withdrawals, and capital gains and it totals less than $83,350, there is no capital gains tax.

1099-R: This is probably the most important form to most clients. It reports how much money you distributed from your retirement accounts (IRA, 401(k), etc.). It does not apply to Roth IRAs.

Required Minimum Distributions (RMDs): I get a tremendous number of questions on this subject. The IRS just raised the age at which you need to start withdrawing money from your retirement accounts each year (from 72 to 73). The amount you need to remove depends on your age. At 73 the amount is around 4 percent. It goes up a little each year. At age 80 you need to take out around 5% from your retirement accounts. At age 90 it climbs to 8%; at age 100 it's 15%.

Stretch IRA: When you pass your retirement accounts on to your heirs, they don't need to cash in the account right away. This would trigger massive taxation. The IRS now gives them 10 years to spread the tax burden over time.

Standard Deduction: The vast majority of you will utilize the standard deduction. If you are married, you can deduct $27,700 from your income. Meaning that if your income is $100,000, you only have to pay taxes on $72,300 after the standard deduction. If you are single, the number is $13,850.

The only time you would not use the standard deduction is in situations where you have several other deductions (mortgage interest, charitable giving, etc.). These are called itemized deductions. If these deductions exceed the standard deduction, you would deduct that amount. About 90 percent of the U.S. population uses the standard deduction.

For example, if you are married and your mortgage interest is $15,000, you do not get to deduct it from your taxes, as it is less than the standard deduction.

Progressive Taxation: I find some people can have difficulty with this concept. I put the tax rates at the bottom of this article.

This is where the confusion comes in. Some people believe if they make one dollar over the 12 percent threshold they must pay 22 percent income tax on all their income. This is not how this works.

Let’s say you are single and make $89,077.

The first $9,875 is taxed at 10 percent. From $10,275 to $41,775 you pay 12 percent. From $41,775 to $89,076 you pay 22 percent. So if your income is $89,077, you would only pay 24 percent on that one dollar.

Cost Basis: First look at how much you paid for a stock, bond, or real estate property. Then look at the selling price. You must pay taxes between the cost basis and the selling price. This does not apply to retirement accounts.

Estate Tax: Florida has no estate tax. As far as the federal estate tax goes, it only applies to people worth over $12.92 million dollars.

Gift Tax: This is also extremely misunderstood. Unless you are worth over 12.92 million dollars, you can gift as much as you want. Be generous. You might have to complete a gift tax form for the IRS, but neither you nor the recipient will have to pay taxes.

State Investment Income Tax: Florida does not tax investment income. Some states do. If you lived in New York, in additional to federal tax, you would have to pay an extra 8.82% tax on the gains from your investments. There's a reason why rich people have their residency in Florida!

I hope this helped.

Be Blessed,

Dave

I am holding Social Security webinars each Saturday at 10:00 AM. Go to www.SocialSecurityRSVP.com to register.