Retirement Is Not Tax-Free
Retirement Is Not Tax-Free

Retirement Is Not Tax-Free

Retirement Is Not Tax-Free

What many people don’t realize that that when they start drawing funds from those 401(k)s, they’re taxed. One of the reasons the accounts are so popular, is that a traditional 401(k) is funded from pre-tax paychecks, so the money deposited into the plan and any gains on the investment are not taxed until the money is taking out. These withdrawals are called “distributions” and there are strict rules about Required Minimum Distributions, known as RMDs.

In the article “How 401(k) savers can avoid a nasty surprise come retirement,” Market Watch advises readers that these contributions are worthwhile, since they lower taxable income. Contributing enough can even move a taxpayer into a lower tax bracket for a given year, if they are able to do so.

However, there’s always payback where Uncle Sam is concerned. In this case, when distributions are taken, they are subject to ordinary income taxes. That’s why it’s called a “tax-deferred” account—taxes are deferred or put off. They aren’t tax free.

People who work in estate planning or personal finance tend to assume that everyone knows this, but that’s not the case. Just as they are about to retire, a great saver may look at their 401(k) balances and be so happy to consider how all their hard work and diligent savings have paid off. However, even if they have a million dollars in an account, the reality is, that $1 million is actually worth more like $700,000, if they are paying federal, state and local taxes. The same is true with balances of any size.

It is still important to continue saving in a 401(k) or any other kind of retirement account. However, you must keep that tax obligation in mind, when you’re setting any kind of financial retirement goals. Tax rates in the future are unknowns, but plan on roughly 20% in federal tax, and maybe another 3–10% in state and local taxes, depending upon where you live.

If you use an online retirement calculator to help you plan and estimate your goals and costs in retirement, make sure that the calculator takes taxes into account.

Everyone’s strategy for building a retirement nest egg is different. However, there are certain rules to consider, based on age. Once you turn 59½, you are allowed to take money from your 401(k) without penalties, but you will probably pay at least 20% in federal income tax, plus state and local income.

If you are taking withdrawals at this age and still drawing a paycheck, you might be moving yourself into a higher tax bracket. If you turn 65, withdrawing enough to move into a higher tax bracket may also mean that you are paying higher Medicare premiums.

For those who continue working into their 60s and 70s, a good goal is to preserve your 401(k) accounts for as long as possible. You are not obligated to take any money out of a traditional 401(k), until you turn 70.5. At this point, the Required Minimum Distributions must begin. Legislation pending as of this writing (the SECURE act) may change the age requirement for RMDs, but until the legislation becomes laws, the age remains at 70.5.

Reference: Market Watch (June 3, 2019) “How 401(k) savers can avoid a nasty surprise come retirement”

Retirement Is Not Tax-Free

Sell an Inherited Home to your Relative?
Sell an Inherited Home to your Relative?

Sell an Inherited Home to your Relative?

Sell an Inherited Home to your Relative?

Sometimes a kindness to a family member can backfire in unexpected costs. It is best to be fully informed about the short and long-term impact of any well-intentioned actions. The woman in this scenario gave her sister a $25,000 reduction in the price of the home, which was sold far below the appraisal value, according to the Los Angeles Times’ article “Selling an inherited house to a relative will affect tax treatment.”

For her generosity, the sister will not be able to take any kind of a loss on her taxes as a result of the lowered price.

The law is not entirely clear on the topic, because every situation is different, but the IRS and the Tax Court both frown on any use of real estate for personal purposes, after the death of a parent.

When it comes to a capital loss, the IRS appears to require that the inherited property be sold in an “arm’s length” transaction to an unrelated person. This means that both parties in the transaction, the buyer and the seller, are both acting in their own best interest and are not imposing any pressure or duress on each other in the transaction. Selling an inherited home to a sister is definitely not an “arm’s length” transaction, because of the relationship of the buyer and the seller.

The IRS also requires that the heirs and siblings did not use the property for personal purposes and did not intend to convert the property to personal use before the sale.

Even the Tax Court cases appear to at least require a conversion to an income-producing purpose before the sale, and no personal use of the property after the death of the parent.

While the family may find a court willing to say that a personal use by a sibling is not a personal use by the heir, and from the executor’s position, it was converted to investment property. However, in this case, an outright sale to a sibling and not an unrelated person makes it highly unlikely that the IRS would be amenable to the person taking a tax loss on the sale.

Talk with an experienced estate planning attorney before selling any large inherited asset to a family member or a non-family member. There are tax implications for the sale of inherited property that may not be readily apparent. The estate planning attorney will be able to explain the tax consequences and help create a plan for achieving the final end result, without creating any additional costs.

Reference: Los Angeles Times (June 2, 2019) “Selling an inherited house to a relative will affect tax treatment.”

Sell an Inherited Home to your Relative? Careful consideration of the tax due may cause you to sell it to a third party.

Take Social Security When?
Take Social Security When?

Take Social Security When?

Take Social Security When? Applications for Social Security benefits can only be processed four months before benefits are scheduled to begin. Therefore, the earliest you can apply is age 61 and nine months, and you can expect to receive your first payment four months later–the month after your birthday. However, the benefit payments come after each full month of eligibility.

Investopedia’s recent article, “When To Apply For Social Security Retirement Benefits,” says that applying for Social Security benefits is a pretty simple process.

Applications can be submitted either online, over the phone, or in person at your local Social Security office. A very convenient way to apply is online at the Social Security Administration website. The application itself takes about 15 minutes and can be saved at any point for future completion. This application can also be used to apply for Medicare.

You should apply three months before you’d like to start getting the checks. To be certain that it’s a quick and easy application process, have all the necessary information on hand before starting. This includes things like birth and marriage dates, Social Security number, proof of citizenship, tax information, employment history, military records, health insurance information and bank account information for direct deposit.

Once you’ve finished the application and supplied all the requested information, you’re given a receipt for your records and a confirmation number to monitor the status of your application online after submission. Depending on your situation and what documentation is required, your application may be approved in the same month you applied.  What happens to benefits and my spouse?

The benefit payment schedules are now dictated by date of birth. For people with birthdays between the 1st and 10th, payments will be made on the second Wednesday of every month. If your birthday is between the 11th and 20th, payment is made on the third Wednesday. For those born between the 21st and 31st, payments are made on the fourth Wednesday.

Therefore, if you turn 62 on December 15th, your first payment will get to you on the third Wednesday of the following February. If your birthday is December 15th and you are already over age 62, your first payment will arrive on the third Wednesday of the month following the month in which you apply. If you’re already on Social Security or receive both Social Security and Supplemental Security Income (SSI) payments, you could get them on different dates.

Reference: Investopedia (June 25, 2019) “When To Apply For Social Security Retirement Benefits”


Can Retirement be Recession-Proof?
Can Retirement be Recession-Proof?

Can Retirement be Recession-Proof?

Can Retirement be Recession-Proof? It was a tough time for people who had just retired, but since that time stocks have rebounded in a spectacular manner. However, says Money in the article “This is the Best Way to Recession-Proof Your Retirement, According to Experts,” it is possible that the long rally may be coming to an end.

Is there anything that can be done do to protect your retirement accounts from the next financial disaster? Those who are closest to retirement, are always the most vulnerable to drops in the stock market, and those who are retired and drawing down savings are even more at risk. However, you can build a financial buffer to help your retirement funds survive any downturns.

No one knows when the next recession or stock slide will occur. There will always be one, so it’s best to be prepared. It’s simply an acknowledgement of the real risks of markets. On average, recessions last about 18 months. What can you do?

Build a cushion. Commit to building an emergency fund. That should be three to six months of expenses. And it doesn’t matter how rock solid or large your retirement investments are. If you take money out prematurely, it’s going to weaken your portfolio.

Pay down all debt, or as much as possible. That is key to feeling fiscally secure, once you leave the workforce. This is because less of your assets are tied up in long-term retirement investments. Tackle the highest interest rate debt first.

It’s far easier to adjust discretionary expenses, than it is to add cash to a stockpile. You can skip a vacation. You can’t skip a mortgage payment.

Depending on how close you are to retirement, consider tweaking your investment portfolio.  Portfolios can become unbalanced over time, as assets in different classes grow or fund managers change. Review your portfolio to limit your exposure to volatility. Scrub out any unnecessary risk. That may include putting some money in cash or cash equivalents, like savings accounts, CDs and short-term bond funds.

You don’t have to be very conservative on the entire portfolio. People nearing retirement age usually trim some of their stock holdings. It is not now as black and white. You’ll need stock growth to outpace inflation, so your equity allocation must be fine-tuned.

Many retirees are working part time jobs to keep some cash coming in and minimize what they take from retirement accounts. If you’re earning enough to live on, you can even avoid taking any distributions, except those that are required. Be aware of how your income impacts your Social Security benefits and taxes, if you have already started to take benefits.

There are other advantages to working part time. It keeps you active and engaged with others,  allows your mind to stay sharp and offers the opportunity to socialize with new people.

Finally, make sure your estate plan is in place. You should have a will, power of attorney and healthcare power of attorney. An estate planning attorney can help protect you and your family, regardless of when the next recession arrives.

Reference: Money (March 13, 2019) “This is the Best Way to Recession-Proof Your Retirement, According to Experts”


The Secret Retirement Account HSA
The Secret Retirement Account HSA Health Savings Account

The Secret Retirement Account HSA

The Secret Retirement Account HSA.

Medical care is one of the highest expenses in retirement. There is a way for you to save funds for these costs with a triple tax benefit. You do not get taxed on the money you contribute to your Health Savings Account (HSA), on the money you withdraw from it to pay approved medical expenses, or on the earnings the account generates. You also do not have to use the money in the account, until you choose to do so.

Do not confuse Health Savings Accounts (HSAs) with health care flexible spending accounts (FSAs). The two main differences between HSAs and FSAs are:

  • You can keep thousands of dollars in an HSA for years, even decades. You cannot do that with an FSA.
  • Unlike an FSA, you can invest the money in your HSA into mutual funds, so the account has a possibility for long-term growth and earnings.

The Secret Retirement Account HSA. HSAs  in a Nutshell

You cannot get an HSA account as a stand-alone plan. You have to enroll in a high-deductible health plan that is eligible for HSA accounts. As of 2019, a high-deductible is at least $1,350 for individual coverage and $2,750 for family plans. Once you enroll in an eligible high-deductible health plan, here is what you need to know:

  • The contribution limit into your HSA is $3,450 in 2019 (combined contributions from you and your employer) for an individual plan and $6,850 for a family plan. If you are 55 or older, you can put an extra $1,000 into your account this year. Covered spouses can add an additional $1,000 to their accounts.
  • You usually cannot have both an FSA and an HSA.
  • Your contributions to your has, have to stop when you enroll in Medicare – any kind of Medicare package. The HSA funds can pay your Medicare premiums, but not your Medigap coverage.
  • If your employer does not arrange an HSA provider, you can open an HSA at the provider or your choice. Fees vary, so comparison shop for the best rates. Optum Bank and HealthSavings Administrators are two well-known HSA providers.
  • You do not have to leave the money in your HSA account. You can pay current approved medical expenses with your HSA account.

The Secret Retirement Account HSA. HSAs Are Not for Everyone

HSA accounts have unmatched tax savings potential, but these accounts are not a good choice for everyone. If you have chronic health issues or young children, you might do better off with a traditional form of health insurance like a PPO, instead of a high-deductible health plan. You should not delay getting medical care to keep the funds in the HSA.

It is probably not the right time for you to open an HSA, if it would cause you financial stress. You should use a comparison calculator to decide which health care plan is best for you and your family.

When you eventually withdraw money from your HSA, you must use it for approved medical expenses to avoid getting taxed on the funds. It might be your money, but once it goes into an HSA, the government puts restrictions on how you can use it. Be sure to save all receipts for medical expenses you paid with HSA funds.


AARP. “Your Secret Retirement Investment.” (accessed June 12, 2019)


Medicaid to Pay for Caregiver Services
Medicaid to Pay for Caregiver Services.

Medicaid to Pay for Caregiver Services

Medicaid to Pay for Caregiver Services.

If you have a loved one who needs caregiver services, you might be looking for ways to help the person pay for the care. Your state might offer assistance with more services, or might not cover some of the items in this article, but here is a general overview of government programs that can pay for some caregiver services.

Short-Term Caregiver Services and Medicare

If your loved one is eligible for Medicare, he might get a limited amount of short- term care through Medicare. The requirements for these services include:

  • He is recuperating from an injury or illness.
  • His doctor expects him to return to his previous level of health.
  • He meets the Medicare eligibility criteria.
  • His doctor created a plan of care for him.
  • The services are reasonable and necessary to treat his illness or injury.
  • He only needs the services on a temporary basis.

If your loved one does not need medical treatment or needs services 24 hours a day, Medicare will not provide an aide. Medicare does not give assistance for personal services only. Help with preparing meals, dressing, bathing and similar items are personal care and not covered under Medicare in the absence of necessary medical treatment.

Long-Term Care to Stay Out of the Nursing Home

The government realized it can be far less expensive to provide services that allow a person to continue living at home, rather than pay for residence in a nursing home. When a person lives at home, she pays for her housing, utilities, insurance, food and other expenses.

One such plan is the Program of All-Inclusive Care for the Elderly (PACE). If your loved one is a Medicare or Medicaid enrollee, he can get nursing-home level care in his own home. The recipient does not have to pay a deductible or copayment for the services, medical treatment, or even prescription drugs. PACE can provide skilled nursing, hospice and an in-home caregiver. It is whatever his PACE health care team decides he needs.

The PACE requirements include:

  • Enrollment in Medicaid or Medicare
  • Being 55 years or older
  • Meeting his state’s certification rules for needing nursing home-level care
  • With PACE services, he can live safely in the community.
  • He lives in an area that PACE serves. Some states do not participate in the PACE program.

If your loved one is not on Medicare or your state does not offer the PACE program, he might qualify for Home and Community-Based Services (HCBS), also called the waiver program. This program can help your loved one get a high level of care at home, so she does not have to move into a nursing home or another institutional facility.

The requirements for and services of the Medicaid waiver program vary from state to state. In general, she needs to:

  • Be enrolled in Medicaid.
  • Meet her state’s criteria for level-of-care and functional eligibility.
  • Have a plan of care from her doctor.
  • Meet the income and asset restrictions for her state.

Once she qualifies, depending on the circumstances, she can get a home health aide, skilled nursing, hospice, adult day services and personal care. Some states offer meal programs, transportation to medical care, case management and help with shopping, bill paying and other services. There are other needs that must also be addressed. 

Medicaid to Pay for Caregiver Service. References:

AARP. “Need Help Paying for Your Loved One’s Caregiver?” (accessed June 12, 2019)


Hospice Care Information
Hospice Care Information.

Hospice Care Information

Hospice Care Information.

Like hospice, palliative care is designed to relieve suffering and empower patients. However, palliative care can be used by any patient with a serious illness—it doesn’t require a terminal prognosis to qualify.

Hospice does require a terminal prognosis and is a more intensive service for when an illness has advanced.

AARP’s recent article, “How to Find a Quality Hospice,” explains that hospice care in America is most commonly provided in the patient’s home—or in a long-term care facility where the patient already lives. The hospice team will visit frequently.

“The ultimate goal for hospice care is to take in the patient and family, hold their hand and provide all the care they need,” says Jennifer Kennedy, senior director, regulatory and quality, for the National Hospice and Palliative Care Organization. That includes leaving the family with a belief that they did right for their loved one. “We only have one shot to get it right,” she says.

Hospice and palliative care experts recommend, if possible, interviewing several prospective hospices to weigh the type and quality of their services. When you’ve identified several promising hospices and called to request an informational interview, bring a list of questions to help you determine the type and quality of care your loved one will receive there.

Hospice Care Information. The way in which the hospice responds to the initial inquiry will be important. If they don’t make the patient and family feel nurtured and listened to from the very first call for help, look elsewhere.  Don’t feel guilty about beginning your search as early as possible, so you don’t make a decision in a crisis. Here are some questions to ask a hospice:

  • Does the medical director make home visits to address complex symptoms?
  • How does the hospice respond to patient crises after hours?
  • Does the hospice provide all of the levels of care required by the Medicare hospice benefit?
  • Is the facility accredited by one of the national organizations that survey hospices on their quality?
  • Is the staff individually certified as experts in their field by their recognized professional bodies?
  • Do they have a volunteer program and what does it include?

Reference: AARP (June 27, 2019) “How to Find a Quality Hospice”


What Does a 2008 Fire at Universal Mean to the Heirs of Famous Singers?
What Does a 2008 Fire at Universal Mean to the Heirs of Famous Singers?

What Does a 2008 Fire at Universal Mean to the Heirs of Famous Singers?

What Does a 2008 Fire at Universal Mean to the Heirs of Famous Singers? A warehouse fire on the Universal Studios backlot in Hollywood destroyed master tapes of recordings by famous and culturally significant artists that can never be replaced.

Wealth Advisor’s recent article, “Estates of Tupac and Tom Petty Join Massive Lawsuit Over ‘Biggest Disaster in History of Music’” reports that the fire is said to have destroyed over a half a million song titles, including recordings by John Coltrane, Joni Mitchell, Nirvana, R.E.M., Janet Jackson, Ray Charles, Elton John, Tupac Shakur, Eric Clapton, Ella Fitzgerald, Mary J. Blige, No Doubt, and others. In the recording industry, master tapes are crucial to preserving the integrity of the work of an artist.

These master recordings of deceased artists typically belong to their estate and may bring in millions of dollars to their families every year.

At the time of the fire, Universal Studios said the damage had been restricted to the King Kong attraction and a video vault of some old television shows and movies. A spokesperson for Universal Music Group (UMG) denied that any music had been destroyed in the fire, saying “We had no loss.” The fire actually extended to the Back to the Future Courthouse set and the warehouse holding the song archives.

However, this June, The New York Times published an article entitled “The Day the Music Burned,” which reported the actual details of the 2008 fire. The article reported that an archive building had been destroyed, and many original one-of-a-kind recordings were destroyed. Internal Universal communications surfaced, and the damage described as minimal was later revealed to be catastrophic.

What Does a 2008 Fire at Universal Mean to the Heirs of Famous Singers? The public wasn’t alone when it came to learning the true details of the destruction resulting from the 2008 fire. In some instances, the artists themselves had no clue their recording works had burned in the fire. Now, more than 10 years later, a class-action lawsuit has been filed in U.S. Central District Court in Los Angeles. The plaintiffs are a growing group of artists. The most recent members of the plaintiff class to join are the estates of Tom Petty and Tupac Shakur.

The legal action claims Universal failed to adequately protect and store the master recordings. As a result, UMG breached its contractual responsibility to the artists. The class action complaint also contends that UMG should have disclosed and shared any insurance or other compensation it received from the fire. The plaintiffs reportedly want at least $100 million in compensatory damages.

Court filings state “UMG concealed its massive recovery from plaintiffs, apparently hoping it could keep it all to itself by burying the truth in sealed court filings and a confidential settlement agreement. Most importantly, UMG did not share any of its recovery with plaintiffs, the artists whose life works were destroyed in the fire—even though, by the terms of their recording contracts, plaintiffs are entitled to 50% of those proceeds and payments.”

Reference: Wealth Advisor (July 1, 2019) “Estates of Tupac and Tom Petty Join Massive Lawsuit Over ‘Biggest Disaster in History of Music’”


Retirement Minimum Distribution (RMDs) Fundamentals
Retirement Minimum Distribution (RMDs) Fundamentals

Retirement Minimum Distribution (RMDs) Fundamentals

Retirement Minimum Distribution (RMDs) Fundamentals.

Most people don’t know the rules about required minimum distributions. Also known as “RMDs,” these are the rules that require investors to make withdrawals from their retirement accounts the year that they turn 70½. However, says Forbes in the article “5 Things to Know About RMDs,” these withdrawals can have a major impact on cash flow, taxes and financial planning during retirement. They are legally required to be taken, even if you don’t need them.

If the RMD is not taken at the correct age, there will be a 50% tax on the amount that should have been withdrawn. Add to that the amount of regular income tax on the sum of money withdrawn, and you have an expensive mistake.

There are ways to soften the impact of RMDs. However, you have to know the rules before you can create your strategy. Having a game plan for RMDs will help save the money you saved for many years, and allow that retirement nest egg more time to grow.

Note that there may be some changes coming as a result of the SECURE Act and the RESA Act, if approved.

Retirement Minimum Distribution (RMDs) Fundamentals. Distribution rules that you need to know. The year you mark your 70½ birthday, that is, six months after you turn 70, you have to start taking RMDs from retirement accounts, including 401(k)s. That rule does not apply to Roth IRAs, which generally do not have any RMDs, until the owner dies.

The exception is if you are still working at a company and participating in the company’s 401(k) plan. If that is the case, you may want to roll over all your previous eligible savings into that account, to delay taking an RMD. However, there are also exceptions to this rule. They depend on your ownership stake in the company, so speak with an estate planning attorney to be sure what the requirements are for your situation.

While you’re at it, make sure that the beneficiaries listed on your accounts are correctly documented. If it’s been more than a few years since you last reviewed your beneficiaries, there may be some time bombs hidden in your IRA accounts. Divorce, death and changes of circumstances may make it necessary for you to change your beneficiaries. Do it now, while it’s on your mind. Once you die, there’s no recourse for your heirs.

When do I take my first RMD? RMDs must be taken by December 31st of each calendar year. However, the first RMD must be taken for the year in which you turn 70½. You can delay that payment until April of the following year. If you end up taking two big distributions, will it throw your tax planning off? Will you be bumped into a higher tax bracket? This is why you need to plan your RMD out carefully. It may be better for your overall situation to take the RMD, as soon as you are eligible.

Accuracy counts. You can’t rely on an online calculator, since the rules are not one size fits all. Let’s say your spouse is ten years younger than you and is your sole beneficiary. You’ll need to use the Joint Life and Last Survivor Table. There’s also the Uniform Lifetime Table, but that doesn’t apply here. Check with professionals to be sure you are taking the right amount.

Where does your RMD come from? Even if 70½ is a few years away, it’s good to have a plan for how RMDs will impact the distribution of your investment portfolio. You have options, so you want to make a good choice. For example, do you want distributions to be made in proportion to the percentage of each of your holdings in your portfolio? Let’s say 40% of your retirement investment is in short-term bonds, then you would take out 40% from your investment holdings. Or do you want to take a percentage from specific holdings?

What about charitable giving? Once you turn 70 ½, you can directly transfer funds from a traditional IRA to a charity, which can reduce your tax burden. However, this must be done properly, directly to the charity.

The rules of RMD are complicated, and mistakes can be expensive. Think about your strategy early on, to make sure it’s done right.

Reference: Forbes (May 14, 2019) “5 Things to Know About RMDs”

Retirement Minimum Distribution (RMDs) Fundamentals.

Is My Irrevocable Trust Revocable?
Is My Irrevocable Trust Revocable?

Is My Irrevocable Trust Revocable?

Is My Irrevocable Trust Revocable?

Irrevocable trusts aren’t as irrevocable as their name implies, according to Barron’s recent article, “Are Irrevocable Trusts True to Their Name?” The article says that, for both new and existing trusts, there are ways to build in flexibility to make changes to a grantor’s wishes, if terms are no longer appropriate or desirable for beneficiaries.

However, there are strict rules that apply. These rules vary between states. One of the main reasons for an irrevocable trust, is to remove assets from an estate for estate tax purposes and to make it unavailable for medicaid purposes. If the rules aren’t followed carefully, a trust can be rendered unlawful. If that happens, the assets may be returned to the grantor’s estate and estate taxes and nursing home costs may apply.

If you want to be certain that beneficiaries have some discretion in the future if circumstances change, grantors should build flexibility into the trust when it’s established. This can be accomplished by giving a power of appointment to beneficiaries. However, if the beneficiaries are looking to change the terms or the structure of an existing trust, the trust must be modified, according to state law.

Most states allow trusts to be decanted. When you decant a trust, you pour its terms into a new trust, and leave out the parts that are no longer wanted. Just like decanting a bottle of wine, it’s like the sediment left in the wine bottle.

In a state that doesn’t permit decanting, a trustee can ask a judge to allow it. You should be careful with decanting, because you don’t want to do anything that would adversely affect the original tax attributes of the trust.

The power of appointment in a trust or the ability to decant can’t be given to the person who set up the trust. Thus, grantors can’t have a “re-do” or rescind the terms. It’s only trustees and the beneficiaries that can do that.

If you and your attorney create a trust with a lot of flexibility for the trustee, you may want to appoint an institutional trustee from a bank, trust, or other financial services company.

They can be either the sole trustee or serve as co-trustees with a personal, non-institutional trustee, like a family member. This can help to eliminate future conflicts.

Reference: Barron’s (June 18, 2019) “Are Irrevocable Trusts True to Their Name?”

Is My Irrevocable Trust Revocable?