2017 Retirement Contribution Limits Unchanged

Retirement plan contributions are supposed to be indexed and adjusted annually in line with the change in the rate of inflation. But only in the governmental fantasy world of non-inflation are adjustments not necessary.

That is to say, in case you missed it, the contribution limits to your 401(k) plan, IRA and Roth IRA—set by the government each year based on the inflation rate—will not go up in 2017.  Just like this year, you will be able to defer up to $18,000 of your paycheck to your 401(k), and individuals over age 50 will still be able to make a “catch-up” contribution of an additional $6,000.  (The same limits apply to 403(b) plans and the federal government’s new Thrift Savings Plan.)  Your IRA and Roth IRA contributions will continue to max out at $5,500, plus a $1,000 “catch-up” contribution for persons 50 or older.

SEP IRA and Solo 401(k) contribution limits, meanwhile, will go up from $53,000 this year to $54,000 in 2017.

The government has made small changes to the income limits on who can make deductions to a Roth IRA and who can claim a deduction for their contribution to a traditional IRA.  The phaseout schedule (income range) for single filers for 2016 starts at $117,000 and contributions are entirely phased out at $132,000; for joint filers the current range is $186,000 to $196,000.  In 2017, the single phaseout will run $1,000 higher, from $118,000 to $133,000, and the joint phaseout threshold will rise $2,000, to $188,000 up to $198,000.  Single persons who have a retirement plan at work will see the income at which they can no longer deduct their IRA contributions go up $1,000 as well, with the phaseout starting at $62,000 and ending at $72,000.  Couples will see their phaseout schedule rise to $99,000 to $119,000.

If you would like to review your retirement plan options, current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Sources:

http://money.cnn.com/2016/10/27/retirement/401k-ira-contribution-2017/index.html?iid=Lead

http://www.investopedia.com/articles/retirement/111516/2017-cola-adjustments-overview.asp?partner=mediafed

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

Roth IRA Conversions after Age 70-1/2

A Roth IRA conversion allows you to move a sum of money from a traditional/rollover IRA into a Roth IRA, pay the taxes due, and thereby convert the future distributions into a tax-free stream out of the Roth IRA for yourself or your heirs.  You probably already know that the IRS requires you to start taking mandatory distributions from your traditional IRA when you turn 70 1/2, even if you don’t actually need the money.  A Roth IRA has no such annual minimum distribution requirement for the original owner and spouse. So the question is: can you do a Roth conversion at that late date, and thereby defer distributions forever?

The answer is that you CAN do a Roth conversion at any time, including after age 70 1/2.  But that might not be ideal tax planning.  Why?  Because at the time of the conversion, you would have to pay ordinary income taxes on the amount converted—basically, paying Uncle Sam up-front for what you would owe on all future distributions.  So, from a tax standpoint, you’re either paying taxes on yearly distributions or all at once.  (Or, if it’s a partial conversion, on the amount transferred over.)  If the goal was to avoid having to pay taxes on that money until you needed it, the conversion kind of defeats the purpose. Unless, of course, you have little other taxable income, and adding a Roth Conversion amount costs you little or nothing in taxes

The traditional reason people made Roth conversions was to pay taxes at a lower rate today than the rate they expect to have to pay on distributions in the future.  They might also want to convert in order to leave the Roth IRA dollars to heirs who might be in a higher tax bracket (keep in mind that a heir who is not your spouse is required to take a minimum, albeit non-taxable, distribution from a Roth IRA).  But with the new Republican Administration taking over, and Republicans controlling both houses of Congress, tax rates are odds-on favorites to go down, not up, in the near future.

If you still want to go ahead and make a conversion after the mandatory distribution date, the law says that you have to take your mandatory withdrawal from your IRA before you do your conversion. That means that you can’t make a 100% conversion of your traditional IRA if you are subject to minimum distribution requirements.  Regardless, you or your tax advisor should “run the numbers” to ensure that you understand the taxes and tax rates that apply before and after the Roth Conversion.

If you would like to review your current investment portfolio or discuss any other tax or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch. We start with a specific assessment of your personal situation. There is no rush and no cookie-cutter approach. Each client is different, and so is your financial plan and investment objectives.

Source:
http://time.com/money/4568635/roth-ira-conversion-year-turn-70-%C2%BD/?xid=tcoshare

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

An Estate Plan for your Digital Assets

In recent years, a new category of assets has appeared on the scene, which can be more complicated to pass on at someone’s death than stocks, bonds and cash.  The list includes such valuable property as digital domain names, social media accounts, websites and blogs that you manage, and pretty much anything stored in the digital “cloud.”  In addition, if you were to die tomorrow, would your heirs know the pass-codes to access your iPad or smartphone?  Or, for that matter, your e-mail account or the Amazon.com or iTunes shopping accounts you’ve set up?  Would they know how to shut down your Facebook account, or would it live on after your death?

A service called Everplans has created a listing of these and other digital assets that you might consider in your estate plan, and recommends that you share your logins and passwords with a digital executor or heirs.  If the account or asset has value (airline miles or hotel rewards programs, domain names) these should be transferred to specific heirs—and you can include these bequests in your will.  Other assets should probably be shut down or discontinued, which means your digital executor should probably be a detail-oriented person with some technical familiarity.

The site also provides a guide to how to shut down accounts; click on “F,” select “Facebook,” and you’re taken to a site (https://www.everplans.com/articles/how-to-close-a-facebook-account-when-someone-dies) which tells you how to deactivate or delete the account.  Note that each option requires the digital executor to be able to log into the site first; otherwise that person would have to submit your birth and death certificates and proof of authority under local law that he/she is your lawful representative.  (The executor can also “memorialize” your account, which means freezing it from outside participation.)

The point here is that even if you know who would get your house and retirement assets if you were hit by a bus tomorrow, you could still be leaving a mess to your heirs unless you clean up your digital assets as well.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Sources:

https://www.everplans.com/articles/a-helpful-overview-of-all-your-digital-property-and-digital-assets

The MoneyGeek thanks guest writer Bob Veres for his contribution to this post

It’s 2015: Do You Know Who Your Beneficiaries Are?

Many IRA owners may not be aware that after their death, the primary beneficiary — usually the surviving spouse — may have the right to transfer part or all of the IRA assets into another account.

Many investors have taken advantage of pretax contributions to their company’s employer-sponsored retirement plan and/or make annual contributions to an IRA. If you participate in a qualified plan program you may be overlooking an important housekeeping issue: beneficiary designations.

An improper designation could make life difficult for your family in the event of your untimely death by putting assets out of reach of those you had hoped to provide for and possibly increasing their tax burdens. Further, if you have switched jobs, become a new parent, been divorced, or survived a spouse or even a child, your current beneficiary designations may need to be updated.

Consider the “What Ifs”

In the heat of divorce proceedings, for example, the task of revising one’s beneficiary designations has been known to fall through the cracks. While a court decree that ends a marriage does terminate the provisions of a will that would otherwise leave estate proceeds to a now-former spouse, it does not automatically revise that former spouse’s beneficiary status on separate documents such as employer-sponsored retirement accounts and IRAs.

Many IRA owners may not be aware that after their death, the primary beneficiary — usually the surviving spouse — may have the right to transfer part or all of the IRA assets into another account. Take the case of the IRA owner who has children from a previous marriage. If, after the owner’s death, the surviving spouse moved those assets into his or her own IRA and named his or her biological children as beneficiaries, the original IRA owner’s children could legally be shut out of any benefits.

Also keep in mind that the law requires that a spouse be the primary beneficiary of a 401(k) or a profit-sharing account unless he/she waives that right in writing. A waiver may make sense in a second marriage — if a new spouse is already financially set or if children from a first marriage are more likely to need the money. Single people can name whomever they choose. And non-spouse beneficiaries are now eligible for a tax-free transfer to an IRA.

The IRS has also issued regulations that dramatically simplify the way certain distributions affect IRA owners and their beneficiaries. Consult your tax advisor on how these rule changes may affect your situation.

To Simplify, Consolidate

Elsewhere, in today’s workplace, it is not uncommon to switch employers every few years. If you have changed jobs and left your assets in your former employers’ plans, you may want to consider moving these assets into a rollover IRA. Consolidating multiple retirement plans into a single tax-advantaged account can make it easier to track your investment performance and streamline your records, including beneficiary designations.

Review Your Current Situation

If you are currently contributing to an employer-sponsored retirement plan and/or an IRA, contact your benefits administrator — or, in the case of the IRA, the financial institution — and request to review your current beneficiary designations. You may want to do this with the help of your tax advisor or estate planning professional to ensure that these documents are in synch with other aspects of your estate plan. Ask your estate planner/attorney about the proper use of such terms as “per stirpes” and “per capita” as well as about the proper use of trusts to achieve certain estate planning goals. Your planning professional can help you focus on many important issues, including percentage breakdowns, especially when minor children and those with special needs are involved.

Finally, be sure to keep copies of all your designation forms in a safe place and let family members know where they can be found.

This communication is not intended to be tax or legal advice and should not be treated as such. Each individual’s situation is different. If you would like to review your current beneficiary designations or discuss any other estate or financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Interest Rates: What’s the Connection to Your Portfolio?

When it comes to interest rates, one thing’s for certain: What goes down will eventually come up.

The federal funds rate — the rate on which short-term interest rates are based — has varied significantly over time. It’s a cycle of ups and downs that can affect your personal finances — your credit card rates, for example. But what about less familiar effects, like those that interest rate changes can have on your investments? Understanding the relationship between bonds, stocks, and interest rates could help you better cope with inevitable changes in our economy and your portfolio.

Bond Market Mechanics

Interest rates often fall in a weak economy and rise as it strengthens. As the economy gathers steam, companies experience higher costs (wages and materials) and they usually borrow money to grow. That’s where bond yields and prices enter the equation.

What is yield? It’s a measure of a bond’s return based on the price the investor paid for it and the interest the bond will pay. Falling interest rates usually result in declining yields. As rates spiral downward, businesses and governments “call” or redeem the existing bonds they’ve issued that carry higher interest rates, replacing them with new, lower-yielding bonds. Why? To save money. (A homeowner refinances his or her home at a lower mortgage rate for the same reason.)

Interest rate changes affect bond prices in the opposite way. Declining interest rates usually result in rising bond prices and vice versa — think of it as a seesaw relationship. What causes this change? When interest rates rise, investors flock to new bonds because of their higher yields. Therefore, owners of existing bonds reduce prices in an attempt to attract buyers.

Investors who hold on to bonds until maturity aren’t concerned with this seesaw relationship. But bond fund investors may see its effects over time.

Evaluating Equities

Interest rate changes can also affect stocks. For instance, in the short term, the stock market often declines in the midst of rising interest rates because companies must pay more to borrow money for expansion and capital improvements. Increasing rates often impact small companies more than large, well-established firms. That’s because they usually have less cash, shorter track records, and other limited resources that put them at higher risk. On the other hand, a drop in interest rates may result in higher stock prices if corporate profits increase.

So why do some stocks increase in value even as interest rates rise, or vice versa? Because industry or company-specific factors — such as the development of a new product — can impact stock prices more than rate changes.

Taking Action

Is there anything an investor can do when faced with interest rate uncertainty? You bet. Although you can’t change interest rates, you can assemble a portfolio that can potentially ride out the inevitable ups and downs. Risk reduction begins with diversifying your investments in as many ways as possible.

Let’s start with equities. Consider investing across different sectors, because no one knows which of today’s industries will fuel the next expansion. Also be aware that some sectors — such as energy — are more economically sensitive than others, which can lead to increased volatility. Additionally, consider stocks or stock mutual funds that invest in different market caps (sizes) and have different investing styles, such as both value and growth investing.

On to fixed-income investments: Do your bond funds hold bonds of different maturities — short, medium and long-term — and types, such as government and corporate? Different types of bonds react in their own way to interest rate changes. Long-term bonds, for instance, are more sensitive to rate changes than short-term bonds.

Interest rates will always fluctuate in response to economic conditions. Rather than trying to guess the Federal Reserve’s next move, why not concentrate on creating a portfolio that will serve your needs well — no matter which way rates go?

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Put Time on Your Side With the Power of Compounding

Sometimes people put off saving for retirement because so many other things seem to get in the way. Do you find yourself among them? If so, try to overcome the urge to procrastinate and start saving as soon as possible. When it comes to investing for long-term goals, time can be a powerful ally.

Time and Investment Returns

The reason time can work for you is because of a concept called compounding. The idea behind compounding is simple — when your investment earns money, this amount is reinvested in your account and potentially generates more earnings. Over time, this process can increase the growth potential of your original investment. If your earnings are reinvested for a long enough period, compounding can reduce some of the pressure on you to invest greater amounts as you approach retirement.

The power of reinvested earnings partly explains why some people who start investing early in their careers often end up with more money than people who start later, even if their total contributions are less.

Compounding With Every Paycheck

Your employer-sponsored plan may be one of the most convenient ways to make compounding work for you. Every paycheck, you have a new opportunity to add to your retirement savings. For 2015, you may be able to contribute a maximum of $18,000 (check with your employer, because some organizations may impose lower limits). If you are age 50 or older, you may also have the opportunity to save up to $6,000 more. Even if you cannot afford to invest the maximum amount, try to do as much as you can.

Of course, you can’t benefit from compounding if you don’t stay invested. Withdrawing money during your working years could wipe out or reduce the savings you have accumulated, which would reduce some of the benefit of compounding.

So don’t procrastinate. Start saving as soon as possible and take advantage of what compounding can potentially do for you.

If you would like to review your current investment portfolio or discuss any other financial planning matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

Love, Marriage and Finances

Marriage affects your finances in many ways, including your ability to build wealth, plan for retirement, plan your estate, and capitalize on tax and insurance-related benefits. There are, however, two important caveats. First, same-sex marriages are recognized for federal income and estate tax reporting purposes. However, each state determines its own rules for state taxes, inheritance rights, and probate, so the legal standing of same-sex couples in financial planning issues may still vary from state to state. Second, a prenuptial agreement, a legal document, can permit a couple to keep their finances separate, protect each other from debts, and take other actions that could limit the rights of either partner.

Building Wealth

If both you and your spouse are employed, two salaries can be a considerable benefit in building long-term wealth. For example, if both of you have access to employer-sponsored retirement plans and each contributes $18,000 a year, as a couple you are contributing $36,000, twice the maximum annual contribution for an individual ($18,000 for 2015). Similarly, a working couple may be able to pay a mortgage more easily than a single person can, which could make it possible for a couple to apply a portion of their combined paychecks for family savings or investments.

Retirement Benefits

Some (but not all) pensions provide benefits to widows or widowers following a pensioner’s death. When participating in an employer-sponsored retirement plan, married workers are required to name their spouse as beneficiary unless the spouse waives this right in writing. Qualifying widows or widowers may collect Social Security benefits up to a maximum of 50% of the benefit earned by a deceased spouse.

Estate Planning

Married couples may transfer real estate and personal property to a surviving spouse with no federal gift or estate tax consequences until the survivor dies. But surviving spouses do not automatically inherit all assets. Couples who desire to structure their estates in such a way that each spouse is the sole beneficiary of the other need to create wills or other estate planning documents to ensure that their wishes are realized. In the absence of a will, state laws governing disposition of an estate take effect. Also, certain types of trusts, such as QTIP trusts and marital deduction trusts, are restricted to married couples.

Tax Planning

When filing federal income taxes, filing jointly may result in lower tax payments when compared with filing separately.

Debt Management

In certain circumstances, creditors may be able to attach marital or community property to satisfy the debts of one spouse. Couples wishing to guard against this practice may do so with a prenuptial agreement.

Family Matters

Marriage may enhance a partner’s ability to collect financial support, such as alimony, should the relationship dissolve. Although single people do adopt, many adoption agencies show preference for households that include a marital relationship.

The opportunity to go through life with a loving partner may be the greatest benefit of a successful marriage. That said, there are financial and legal benefits that you may want to explore with your beloved before tying the knot.

If you would like to discuss financial planning related to your upcoming or existing marriage or any other investment portfolio management matters, please don’t hesitate to contact us or visit our website at http://www.ydfs.com. We are a fee-only fiduciary financial planning firm that always puts your interests first.  If you are not a client yet, an initial consultation is complimentary and there is never any pressure or hidden sales pitch.

 

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