It's Time for Baby Bommer RMDs!

In 2016, the first wave of baby boomers turned 70½, and many more reach that milestone in 2017 and 2018. What's so special about 70½? That's the age when you must begin taking required minimum distributions (RMDs) from tax-deferred retirement accounts, including traditional IRAs, SIMPLE IRAs, SEP IRAs, SARSEPs, and 401(k), 403(b), and 457(b) plans. Original owners of Roth IRAs are not required to take RMDs.

If you're still employed (and not a 5% owner), you may be able to delay minimum distributions from your current employer's plan until after you retire, but you still must take RMDs from other tax-deferred accounts (except Roth IRAs). The RMD is the smallest amount you must withdraw each year, but you can always take more than the minimum amount.

Failure to take the appropriate RMD can trigger a 50% penalty on the amount that should have been withdrawn — one of the most severe penalties in the U.S. tax code.

Distribution deadlines

Even though you must take an RMD for the tax year in which you turn 70½, you have a one-time opportunity to wait until April 1 (not April 15) of the following year to take your first distribution. For example:

  • If your 70th birthday was in May 2017, you turned 70½ in November and must take an RMD for 2017 no later than April 1, 2018.
  • You must take your 2018 distribution by December 31, 2018, your 2019 distribution by December 31, 2019, and so on.

IRS tables

Annual RMDs are based on the account balances of all your traditional IRAs and employer plans as of December 31 of the previous year, your current age, and your life expectancy as defined in IRS tables.

Most people use the Uniform Lifetime Table (Table III). If your spouse is more than 10 years younger than you and the sole beneficiary of your IRA, you must use the Joint Life and Last Survivor Expectancy Table (Table II). Table I is for account beneficiaries, who have different RMD requirements than original account owners. To calculate your RMD, divide the value of each retirement account balance as of December 31 of the previous year by the distribution period in the IRS table.

Aggregating accounts

If you own multiple IRAs (traditional, SEP, or SIMPLE), you must calculate your RMD separately for each IRA, but you can actually withdraw the required amount from any of your accounts. For example, if you own two traditional IRAs and the RMDs are $5,000 and $10,000, respectively, you can withdraw that $15,000 from either (or both) of your accounts.

Similar rules apply if you participate in multiple 403(b) plans. You must calculate your RMD separately for each 403(b) account, but you can take the resulting amount (in whole or in part) from any of your 403(b) accounts. But RMDs from 401(k) and 457(b) accounts cannot be aggregated. They must be calculated for each individual plan and taken only from that plan.

Also keep in mind that RMDs for one type of account can never be taken from a different type of account. So, for example, a 401(k) required distribution cannot be taken from an IRA. In addition, RMDs from different account owners may never be aggregated, so one spouse's RMD cannot be taken from the other spouse's account, even if they file a joint tax return. Similarly, RMDs from an inherited retirement account may never be taken from accounts you personally own.

 

What You Can Do with a Will

A will is often the cornerstone of an estate plan. Here are five things you can do with a will.

Distribute property as you wish

Wills enable you to leave your property at your death to a surviving spouse, a child, other relatives, friends, a trust, a charity, or anyone you choose. There are some limits, however, on how you can distribute property using a will. For instance, your spouse may have certain rights with respect to your property, regardless of the provisions of your will.

Transfers through your will take the form of specific bequests (e.g., an heirloom, jewelry, furniture, or cash), general bequests (e.g., a percentage of your property), or a residuary bequest of what's left after your other transfers. It is generally a good practice to name backup beneficiaries just in case they are needed.

Note that certain property is not transferred by a will. For example, property you hold in joint tenancy or tenancy by the entirety passes to the surviving joint owner(s) at your death. Also, certain property in which you have already named a beneficiary passes to the beneficiary (e.g., life insurance, pension plans, IRAs).

Nominate a guardian for your minor children

In many states, a will is your only means of stating who you want to act as legal guardian for your minor children if you die. You can name a personal guardian, who takes personal custody of the children, and a property guardian, who manages the children's assets. This can be the same person or different people. The probate court has final approval, but courts will usually approve your choice of guardian unless there are compelling reasons not to.

Nominate an executor

A will allows you to designate a person as your executor to act as your legal representative after your death. An executor carries out many estate settlement tasks, including locating your will, collecting your assets, paying legitimate creditor claims, paying any taxes owed by your estate, and distributing any remaining assets to your beneficiaries. As with naming a guardian, the probate court has final approval but will usually approve whomever you nominate.

Specify how to pay estate taxes and other expenses

The way in which estate taxes and other expenses are divided among your heirs is generally determined by state law unless you direct otherwise in your will. To ensure that the specific bequests you make to your beneficiaries are not reduced by taxes and other expenses, you can provide in your will that these costs be paid from your residuary estate. Or, you can specify which assets should be used or sold to pay these costs.

Create a testamentary trust or fund a living trust

You can create a trust in your will, known as a testamentary trust, that comes into being when your will is probated. Your will sets out the terms of the trust, such as who the trustee is, who the beneficiaries are, how the trust is funded, how the distributions should be made, and when the trust terminates. This can be especially important if you have a spouse or minor children who are unable to manage assets or property themselves.

A living trust is a trust that you create during your lifetime. If you have a living trust, your will can transfer any assets that were not transferred to the trust while you were alive. This is known as a pourover will because the will "pours over" your estate to your living trust.

Caveat

Generally, a will is a written document that must be executed with appropriate formalities. These may include, for example, signing the document in front of at least two witnesses. Though it is not a legal requirement, a will should generally be drafted by an attorney.

There may be costs or expenses involved with the creation of a will or trust, the probate of a will, and the operation of a trust.

The Newest Way to Beat the Password Paradox

It’s time to refresh your sense of what makes a password safe. Some of the old standards for passwords are changing, and rules you have been following for years may not be keeping your accounts secure any more. Learn the new password rules now, before the hackers break in.

Do all of your passwords contain special numbers and characters? Do you change them every 90 days? Chances are you’ve been following this password advice for many years—but it may not be keeping your accounts safe anymore.

In 2003, engineer Bill Burr authored what came to be known as the official guidance on password security published by the U.S. National Institute of Standards and Technology (NIST). In it, he suggested that users strengthen passwords by incorporating uppercase letters, numbers, and characters. Burr also recommended changing passwords frequently.

Quickly, Burr’s recommendations became the gold standard on password security. But now Bill Burr regrets the password advice in his original guide. In a recent interview with the Wall Street Journal, Burr acknowledged that his suggestions may actually have led people to use less secure passwords.

Asking people to change a password every 90 days typically results in users making a minor change, such as adding a number to the end of the existing password. That change does little to increase password security. And all the characters, numbers, uppercase letters and lowercase letters make it harder for people to remember their passwords without offering much increase in security value. Once masses of people adopted this trend, the hackers caught on and they can now break these types of passwords in a couple of days.

So what can you do to create hard-to-hack but easy-to-remember passwords?

The new password creation method

As we mention in Hack-Proof Your Life Now!, Security experts and the NIST now say stringing five random words together is the best method for password creation. Believe it or not, the password “Twins July Motor Buckle Add” would most likely take longer to hack compared to the password “C0mpu+3r45.”

Why? For one, five-word passwords tend to be longer than our old passwords. Also, choosing five words tends to create more random passwords, which add security. Password strength is determined by a factor called entropy—the amount of randomness or uncertainty your password contains.

But to truly create a strong five-word password, you shouldn’t choose the words yourself. Studies have shown that even when we think we are choosing random words, we are strongly influenced by how often that word occurs in regular conversation, as well as grammatical rules.

Security experts recommend the Diceware method to create your strong passwords.

Here, you roll a die five times to create a random number. For example, say you roll a 2, 6, 3, 1, 1. Then you do that five more times so you have five five-digit numbers, such as:

26311

14563

44452

12556

22215

Then use the 7,776-word Diceware list to match each 5-digit number to the corresponding word on the list. Using the numbers above, your password would be Frame Booth Orr Assort Cutlet—and leaving those spaces increases security.

Now you may be thinking, “I won’t remember a bunch of random words strung together—especially for multiple passwords!” It’s nearly impossible to remember unique passwords for the ever-growing number of online accounts we accumulate.

The key to remembering

That’s why you must also use a password manager. A password manager is a digital device that stores all of your username and passwords in an encrypted file on your computer and/or in “the cloud.” Your passwords are protected by one master password—the only one you need to remember.

Once you are signed into your manager with your master password, the program will autofill the username and password fields for any known website. If you visit a new site that is not yet stored, you can easily save your login credentials to your password vault. You can also easily update passwords in the manager so you can update all of your passwords usingthe Diceware method.

Some people may question the security of password managers, but those fears are unfounded. Password managers use strong encryption to secure your password files. Your passwords are so secure that if you forget your master password, not even the company can retrieve your passwords. Password managers typically cost $10-$30 annually and most allow you to access your manager and sync your passwords across your various devices, including your smartphone and tablet. Free versions exist, but typically those only work for one device and have limited features. There are many password managers to choose from and it’s best todo some research to see which program best fits your needs. Some options you may consider are Dashlane, LastPass,1Password, and KeePass.

Boost your security, relax your brain

The combination of the Diceware method and a password manager will significantly boost your account security across the Internet. Your multi-word passphrases would take millions of years for hackers to guess. And adding a password manager takes away the issue of having to remember these long passwords for your hundreds of accounts. Instead, enter your new passwords and protect them with one strong password—the only one you have to commit to memory.

© 2017 Horsesmouth, LLC. All Rights Reserved.

Medicare Open Enrollment Begins October 15th

What is the Medicare open enrollment period?

The Medicare open enrollment period is the time during which people with Medicare can make new choices and pick plans that work best for them. Each year, Medicare plans typically change what the plans cost and cover. In addition, your health-care needs may have changed over the past year. The open enrollment period is your opportunity to switch Medicare health and prescription drug plans to better suit your needs.

When does the open enrollment period start?

The Medicare open enrollment period begins on October 15 and runs through December 7. Any changes made during open enrollment are effective as of January 1, 2018.

During the open enrollment period, you can:

  •  Join a Medicare Prescription Drug (Part D) Plan
  • Switch from one Part D plan to another Part D plan
  • Drop your Part D coverage altogether
  • Switch from Original Medicare to a Medicare Advantage Plan
  • Switch from a Medicare Advantage Plan to Original Medicare
  • Change from one Medicare Advantage Plan to a different Medicare Advantage Plan
  • Change from a Medicare Advantage Plan that offers prescription drug coverage to a Medicare Advantage Plan that doesn't offer prescription drug coverage
  • Switch from a Medicare Advantage Plan that doesn't offer prescription drug coverage to a Medicare Advantage Plan that does offer prescription drug coverage

What should you do?

Now is a good time to review your current Medicare plan. As part of the evaluation, you may want to consider several factors. For instance, are you satisfied with the coverage and level of care you're receiving with your current plan? Are your premium costs or out-of-pocket expenses too high? Has your health changed, or do you anticipate needing medical care or treatment?

Open enrollment period is the time to determine whether your current plan will cover your treatment and what your potential out-of-pocket costs may be. If your current plan doesn't meet your health-care needs or fit within your budget, you can switch to a plan that may work better for you.

What's new in 2018?

The initial deductible for Part D prescription drug plans increases by $5 to $405 in 2018. Also, most Part D plans have a temporary limit on what a particular plan will cover for prescription drugs. In 2018, this gap in coverage (also called the "donut hole") begins after you and your drug plan have spent $3,750 on covered drugs — a $50 increase over the 2017 initial coverage limit. It ends after you have spent $5,000 out-of-pocket, after which catastrophic coverage begins. However, part of the Affordable Care Act gradually closes this gap by reducing your out-of-pocket costs for prescriptions purchased in the coverage gap. In 2018, you'll pay 35% of the cost for brand-name drugs in the coverage gap (65% discount) and 44% (56% discount) of the cost for generic drugs in the coverage gap. Each succeeding year, out-of-pocket prescription drug costs in the coverage gap continue to decrease until 2020, when you'll pay 25% for covered brand-name and generic drugs in the gap.

Medicare beneficiaries who file individual tax returns with income that is greater than $85,000, and beneficiaries who file joint tax returns with income that is greater than $170,000, pay an additional monthly premium or Income-Related Monthly Adjustment Amount (IRMAA) for their Medicare Part D prescription drug plan coverage. In 2018, some of these beneficiaries will see their IRMAA increase by as much as 58%, while other beneficiaries may actually see their IRMAA drop. For more information, visit the Centers for Medicare & Medicaid Services website, CMS.gov.

Where can you get more information?

Determining what coverage you have now and comparing it to other Medicare plans can be confusing and complicated. Pay attention to notices you receive from Medicare and from your plan, and take advantage of help available by calling 1-800-MEDICARE or by visiting the Medicare website, medicare.gov.

The accompanying pages have been developed by an independent third party. Commonwealth Financial Network is not responsible for their content and does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.  Securities and advisory services offered through Commonwealth Financial Network,® Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency.

This communication is strictly intended for individuals residing in the state(s) of CA, DC, DE, FL, GA, LA, MD, NJ, NY, NC, PA and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.

 

Tax benefits that can help with the expense of higher education

With back-to-school season in full swing, the Internal Revenue Service reminds parents and students about tax benefits that can help with the expense of higher education.

Two college tax credits apply to students enrolled in an eligible college, university or vocational school. Eligible students include the taxpayer, their spouse and dependents.

American Opportunity Tax Credit

The American Opportunity Tax Credit, (AOTC) can be worth a maximum annual benefit of $2,500 per eligible student. The credit is only available for the first four years at an eligible college or vocational school for students pursuing a degree or another recognized education credential. Taxpayers can claim the AOTC for a student enrolled in the first three months of 2018 as long as they paid qualified expenses in 2017.

Lifetime Learning Credit

The Lifetime Learning Credit, (LLC) can have a maximum benefit of up to $2,000 per tax return for both graduate and undergraduate students. Unlike the AOTC, the limit on the LLC applies to each tax return rather than to each student. The course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. The credit is available for an unlimited number of tax years.

To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Additionally, if claiming the AOTC, the law requires taxpayers to include the school’s Employer Identification Number on this form.

Form 1098-T, Tuition Statement, is required to be eligible for an education benefit. Students receive this form from the school they attended. There are exceptions for some students.

Other education benefits

Other education-related tax benefits that may help parents and students are:

  • Student loan interest deduction of up to $2,500 per year.
  • Scholarship and fellowship grants. Generally, these are tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
  • Savings bonds used to pay for college. Though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years of age.
  • Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education. Contributions to a 529 plan are not deductible, but earnings are not subject to federal tax when used for the qualified education expenses.

To help determine eligibility for these benefits, taxpayers should use tools on the Education Credits Web page and IRS Interactive Tax Assistant tool on IRS.gov.

 

For Women, A Pay Gap Could Lead to a Retirement Gap

Women in the workforce generally earn less than men. While the gender pay gap is narrowing, it is still significant. The difference in wages, coupled with other factors, can lead to a shortfall in retirement savings for women.

Statistically speaking

Generally, women work fewer years and contribute less toward their retirement than men, resulting in lower lifetime savings. According to the U.S. Department of Labor:

  • 56.7% of women work at gainful employment, which accounts for 46.8% of the labor force
  • The median annual earnings for women is $39,621 — 21.4% less than the median annual earnings for men
  • Women are more likely to work in part-time jobs that don't qualify for a retirement plan
  • Of the 63 million working women between the ages of 21 and 64, just 44% participate in a retirement plan
  • Working women are more likely than men to interrupt their careers to take care of family members
  • On average, a woman retiring at age 65 can expect to live another 20 years, two years longer than a man of the same age

All else being equal, these factors mean women are more likely than men to face a retirement income shortfall. If you do find yourself facing a potential shortfall, here are some options to consider.

Plan now

Estimate how much income you'll need. Find out how much you can expect to receive from Social Security, pension plans, and other available sources. Then set a retirement savings goal and keep track of your progress.

Save, save, save

Save as much as you can. Take full advantage of IRAs and employer-sponsored retirement plans such as 401(k)s. Any investment earnings in these plans accumulate tax deferred — or tax-free, in the case of Roth accounts. Once you reach age 50, utilize special "catch-up" rules that let you make contributions over and above the normal limits (you can contribute an extra $1,000 to IRAs, and an extra $6,000 to 401(k) plans in 2017). If your employer matches your contributions, try to contribute at least as much as necessary to get the full company match — it's free money. Distributions from traditional IRAs and most employer-sponsored retirement plans are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10% federal income tax penalty.

Delay retirement

One way of dealing with a projected income shortfall is to stay in the workforce longer than you had planned. By doing so, you can continue supporting yourself with a salary rather than dipping into your retirement savings. And if you delay taking Social Security benefits, your monthly payment will increase.

Think about investing more aggressively

It's not uncommon for women to invest more conservatively than men. You may want to revisit your investment choices, particularly if you're still at least 10 to 15 years from retirement. Consider whether it makes sense to be slightly more aggressive. If you're willing to accept more risk, you may be able to increase your potential return. However, there are no guarantees; as you take on more risk, your potential for loss (including the risk of loss of principal) grows as well.

Consider these common factors that can affect retirement income

When planning for your retirement, consider investment risk, inflation, taxes, and health-related expenses — factors that can affect your income and savings. While many of these same issues can affect your income during your working years, you may not notice their influence because you're not depending on your savings as a major source of income. However, these common factors can greatly affect your retirement income, so it's important to plan for them.

The Family Conversation: Addressing Your Health Care Needs in Retirement

Maybe you and your family have already attempted to have “the conversation.” You know the one: the discussion about your and your spouse’s assets and what will be done with those assets during the rest of your lives and after you pass away. Perhaps, because of your children’s sibling rivalries, the family conversation turned to one about gifts and inheritances and about who deserves more or less of the assets based on “good” or “bad” behavior. If things continued this way, you likely skipped over the most important aspect of this conversation: how the assets will be used to pay for your health care during retirement and how much that health care will cost.

Moving beyond the fear

Most people are aware that life expectancies are on the rise, but we put off thinking about getting older, getting sick or infirm, and having to pay for health care for a prolonged period. Medicare and Medigap premiums, deductibles, and co-payments alone will consume a significant portion of your income. And long-term care expenses can quickly drain even a large nest egg. Recognizing the complications posed by financing health care in retirement can make you fearful and even more reluctant to make any decisions on the matter.

But your family conversation won’t yield a viable plan or a shared understanding without honest and insightful preparation and soul-searching. Asking yourself (and your family) questions about physical, financial, and legal matters is a helpful starting point. You may find it less stressful to review each concept separately. Once you have some answers, you can piece them together to arrive at guidelines for your family’s conversations. And those conversations can lead to building an action plan.

Looking back to get a clearer picture of the future

Before you begin wrestling with your own ideas and concerns, think about your parents’ and grandparents’ experiences:  

  • How old were your grandparents when they died? What illnesses were common among other family members of their generation? You may remember that your grandmother was very forgetful, but you likely don’t remember a diagnosis of dementia.
  • Does longevity run in your family? How old were your parents (and your spouse’s parents) when they died? Or are your and your spouse’s parents still alive? Are they in good health are declining physically or mentally?
  • What were some lessons learned from your grandparents’ and parents’ final years? For example, did an uncle or aunt—or brother or sister—take on the caregiving? How did the caregiver feel about that? It’s common for one sibling to feel saddled with caring for aging parents and grow to resent his or her siblings for not helping with those responsibilities.
  • What is the probability that you or your spouse will live much longer than the other? If one of you incurs large health care expenses during retirement, will the other spouse be able to continue living in his or her current lifestyle?

How and where do you want to live?         

Now, think about how you want to age and how you want to use your assets for your care:

  • Have you thought about long-term care and what it would cost?
  • If you have a long-term care policy, do your children know its benefits?
  • What other resources do you have for funding long-term care?
  • Have you thought about assisted living? If so, what type of assisted living or continuing care residence would offer you the lifestyle you want?
  • If assisted living doesn’t appeal to you, have you considered selling your house and downsizing to a smaller and easier-to-maintain living space, such as a condominium?
  • Will you rely on your children to be your caregivers? One child may be willing to be your caregiver, but has he or she considered how those duties will impact his or her employment and finances?
  • Would you consider relocating to another part of the U.S.? Perhaps your children live in different states, but one of them is more than willing to serve as your future caregiver. Would you be willing to leave established friendships and activities to move where this son or daughter lives?

Whom do you trust?

Even if a dementia diagnosis is not in your future, most people do experience some cognitive decline. So whom do you trust to manage your assets and carry out your financial plan if you are no longer able to? Your most reliable child may live across the country, and the son or daughter whom you (and your other children) are reluctant to trust resides nearby. What do you do?

Beyond these threshold questions, you’ll want to consider several related and equally important issues:

  • Do you have basic estate planning documents, including a last will and testament, power of attorney (POA), and health care POA? If you do have these documents, how old are they? Do they need to be revised?
  • When do you want your general durable POA to take effect—immediately or only years from today after you lose capacity?
  • Do you have a revocable trust? If so, was it drafted and executed before the federal portability and increased exemption amounts became effective?
  • Are the beneficiary designations on your assets correct and up to date? Remember: Those designations—not the terms of your will—determine the distribution of your assets.

Can your family let bygones be bygones?

Finally, ask yourself and your children whether they will be able to put aside long-standing differences to follow through on whatever your wishes may be. This may be the most difficult question to answer objectively.

The answers that guide the conversation you have with your family will be as individual as its members. Your children may not react well to the subject of your lifetime health care needs. But by persisting in your efforts—and factoring aging into the conversation—you can create your own stable framework and perhaps a legacy for your family. And, remember, even if the conversation leads to family strife, you still have a lifeline. Whatever the answers to the questions posed in your conversation and the consequences, you can find helpful guidance by consulting your attorney or financial advisor.

© 2017 Commonwealth Financial Network®

Social Security and Medicare Trustees Report

Every year, the Trustees of the Social Security and Medicare Trust Funds release reports to Congress on the current financial condition and projected financial outlook of these programs. The newest reports, released on July 13, 2017, discuss the ongoing financial challenges that both programs face, and project a Social Security cost-of-living adjustment (COLA) for 2018.

What are the Social Security and Medicare Trust Funds?

Social Security: The Social Security program consists of two parts. Retired workers, their families, and survivors of workers receive monthly benefits under the Old-Age and Survivors Insurance (OASI) program; disabled workers and their families receive monthly benefits under the Disability Insurance (DI) program. The combined programs are referred to as OASDI. Each program has a financial account (a trust fund) that holds the Social Security payroll taxes that are collected to pay Social Security benefits. Other income (reimbursements from the General Fund of the U.S. Treasury and income tax revenue from benefit taxation) is also deposited in these accounts. Money that is not needed in the current year to pay benefits and administrative costs is invested (by law) in special Treasury bonds that are guaranteed by the U.S. government and earn interest. As a result, the Social Security Trust Funds have built up reserves that can be used to cover benefit obligations if payroll tax income is insufficient to pay full benefits.

Note that the Trustees provide certain projections based on the combined OASI and DI (OASDI) Trust Funds. However, these projections are theoretical, because the trusts are separate, and generally one program's taxes and reserves cannot be used to fund the other program.

Medicare: There are two Medicare trust funds. The Hospital Insurance (HI) Trust Fund pays for inpatient and hospital care (Medicare Part A costs). The Supplementary Medical Insurance (SMI) Trust Fund comprises two separate accounts, one covering Medicare Part B (which helps pay for physician and outpatient costs) and one covering Medicare Part D (which helps cover the prescription drug benefit).

Trustees Report highlights: Social Security

  • The combined trust fund reserves (OASDI) are still increasing, but are growing more slowly than costs. The U.S. Treasury will need to start withdrawing from reserves to help pay benefits in 2022, when annual program costs are projected to exceed total income. The Trustees project that the combined trust fund reserves will be depleted in 2034, the same year projected in last year's report, unless Congress acts.
  • Once the combined trust fund reserves are depleted, payroll tax revenue alone should still be sufficient to pay about 77% of scheduled benefits for 2034, with the percentage falling gradually to 73% by 2091.
  • The OASI Trust Fund, when considered separately, is projected to be depleted in 2035, the same year projected in last year's report. Payroll tax revenue alone would then be sufficient to pay 75% of scheduled OASI benefits.
  • The DI Trust Fund is expected to be depleted in 2028, five years later than projected in last year's report. Both benefit applications and the total number of disabled workers currently receiving benefits have been declining. Once the DI Trust Fund is depleted, payroll tax revenue alone would be sufficient to pay 93% of scheduled benefits.
  • Based on the "intermediate" assumptions in this year's report, the Social Security Administration is projecting that beneficiaries will receive a cost-of-living adjustment (COLA) of 2.2% for 2018.

Trustees Report highlights: Medicare

  • Annual costs for the Medicare program exceeded tax income annually from 2008 to 2015. The Trustees project surpluses in 2016 through 2022 and a return to deficits thereafter.
  • The HI Trust Fund is projected to be depleted in 2029, one year later than projected last year. Once the HI Trust Fund is depleted, tax and premium income would still cover 88% of estimated program costs, declining to 81% by 2050, and then gradually increasing to 88% by 2091. The Trustees note that long-range projections of Medicare costs are highly uncertain.

Why are Social Security and Medicare facing financial challenges?

Social Security and Medicare are funded primarily through the collection of payroll taxes. Because of demographic and economic factors, fewer workers are paying into Social Security and Medicare than in the past, resulting in decreasing income from the payroll tax. The strain on the trust funds is also worsening as large numbers of baby boomers reach retirement age, Americans live longer, and health-care costs rise.

What is being done to address these challenges?

Both reports urge Congress to address the financial challenges facing these programs soon, so that solutions will be less drastic and may be implemented gradually, lessening the impact on the public. Combining some of these solutions may also lessen the impact of any one solution.

Some long-term Social Security reform proposals on the table are:

  • Raising the current Social Security payroll tax rate. According to this year's report, an immediate and permanent payroll tax increase of 2.76 percentage points would be necessary to address the long-range revenue shortfall (3.98 percentage points if the increase started in 2034).
  • Raising the ceiling on wages currently subject to Social Security payroll taxes ($127,200 in 2017).
  • Raising the full retirement age beyond the currently scheduled age of 67 (for anyone born in 1960 or later).
  • Reducing future benefits. According to this year's report, scheduled benefits would have to be reduced by about 17% for all current and future beneficiaries, or by about 20% if reductions were applied only to those who initially become eligible for benefits in 2017 or later.
  • Changing the benefit formula that is used to calculate benefits.
  • Calculating the annual cost-of-living adjustment for benefits differently.

According to the Medicare Trustees Report, to keep the HI Trust Fund solvent for the long-term (75 years), the current 2.90% payroll tax would need to be increased immediately to 3.54% or expenditures reduced immediately by 14%. Alternatively, other tax or benefit changes could be implemented gradually and might be even more drastic.

You can view a combined summary of the 2017 Social Security and Medicare Trustees Reports and a full copy of the Social Security report at ssa.gov. You can find the full Medicare report at cms.gov.

Common Questions and Answers About QCDs

Common Questions and Answers About QCDs

As you may know, a qualified charitable distribution (QCD) is a payment made directly from an IRA to an organization that is eligible to receive charitable donations. Although the Protecting Americans from Tax Hikes (PATH) Act made QCDs permanent in 2015, there are specific requirements and circumstances that must be met before an IRA owner can make a QCD. To help you understand the ins and outs of this charitable distribution—and be a go-to resource for your clients—I’ve compiled the following common questions and answers about QCDs.

Q: What Are the Tax Benefits of a QCD?

A: Generally, regular IRA distributions are considered income for the IRA owner and are taxable. Qualifying amounts that clients donate as a QCD, on the other hand, are excluded from their taxable income. As such, they can use QCDs to lower their taxable income and, perhaps, their tax bill while benefiting a cause important to them.

Q: Can an Individual Make a QCD and Take a Charitable Deduction?

A: Although the QCD amount is not taxed, it cannot be claimed as a deduction for a charitable contribution. A tax advisor can help you determine whether a QCD or a charitable deduction provides the most benefit based on their situation.

Q: Who Is Eligible to Make a QCD?

A: To be eligible to make a QCD, the IRA owner must be age 70½. Further, the distribution must be made on or after the date he or she reaches 70½.

Q: What Is the Maximum Distribution Amount?

A: The maximum allowable amount per year that can be distributed as a QCD is $100,000. Any amount above and beyond $100,000 distributed as a charitable donation will not be considered a QCD and will not qualify for the tax benefit under the QCD provisions.

Note: For married taxpayers filing joint tax returns, $100,000 can be donated from each spouse’s IRA.

Q: Can More Than One QCD Be Made per Year?

A: Yes. As long as you are eligible, there is no limit on how many QCDs that can be made. Just be sure that the total amount of the distributions does not exceed the $100,000 annual limit and that the distributions are made by December 31 of the year of distribution.

Q: Can QCDs Be Used to Satisfy Required Minimum Distributions (RMDs)?

A: Yes. QCDs can be used to satisfy RMDs.

Q: Can a QCD Be Made from Any Type of IRA and Retirement Account?

A: No. QCDs can be made only from traditional IRAs and traditional inherited IRAs. (If making a QCD from an inherited IRA, you would still need to be age 70½ to qualify.)

QCDs cannot be made from active retirement accounts that you may have with your employer (e.g., SEP IRAs, SIMPLE IRAs, or qualified retirement plans, such as 401(k)s and 403(b)s). One exception to this rule is for non-active SEP and SIMPLE IRAs; QCDs are available from SEP and SIMPLE IRAs, as long as the plans have been terminated with the employer.

Under certain circumstances, a QCD may be made from a Roth IRA. Roth IRAs, however, are not subject to RMDs and distributions are generally tax-free. So, your clients should consult with a tax advisor to determine if making a QCD from a Roth is appropriate for their set of circumstances.

Q: Are Special Processing Requirements Involved?

A: Yes. To qualify as a QCD, the payment must be made directly from the IRA to the charity. So, when issuing a check from the IRA, the check must be made payable to the charity. The funds cannot be distributed to the IRA owner, for example, and then later donated as a personal check. Typically, the check is mailed directly to the charity. In some situations, it can be mailed to the IRA owner’s address who can then send it to the charity (again, as long as the check is made payable to the charity).

Q: Are All Organizations Eligible to Receive IRA Payments Made as QCDs?

A: No. The receiving charity must be a 501(c)(3) organization eligible to receive tax-deductible contributions. Some of the charities that do not qualify include private foundations and donor-advised funds. Best practice is for your client to confirm with his or her tax preparer or with the organization to confirm eligibility before making the distribution.

Q: How Are QCDs Reported on Tax Documents and Tax Returns?

A: All distributions taken from the IRA will be reported on the Form 1099-R issued to the client and to the Internal Revenue Service (IRS). Here, be sure your client is aware that there is no special coding on this form that designates a distribution as a QCD.

It is recommended that clients notify their tax preparer of their intent to make a QCD. That way, the tax preparer can report the distributions and income recognition accordingly. In general, however, a QCD is reported on Form 1040 as follows: 

  • Enter the full amount as a charitable distribution on the line for IRA distributions.
  • On the line for the taxable amount, enter zero if the full amount was a QCD. Then, enter "QCD" next to this line.

Note: The charitable organization may provide the client with a receipt for the payment, which can be included with the client’s tax filing as proof of the donation.

Q: What if the QCD Is Made from an IRA Consisting of Both Deductible and Nondeductible Contributions?

A: Distributions made under the QCD provisions will be made from the deductible (pre-tax) portion of the IRA before the nondeductible (after-tax) portion.

Posted by Mike Triana

Commonwealth Financial Network® does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation

How Women Are Different from Men, Financially Speaking

We all know men and women are different in some fundamental ways. But is this true when it comes to financial planning? In a word, yes. In the financial world, women often find themselves in very different circumstances than their male counterparts.

Everyone wants financial security. Yet women often face financial headwinds that can affect their ability to achieve it. The good news is that women today have never been in a better position to achieve financial security for themselves and their families.

More women than ever are successful professionals, business owners, entrepreneurs, and knowledgeable investors. Their economic clout is growing, and women's impact on the traditional workplace is still unfolding positively as women earn college and graduate degrees in record numbers and seek to successfully integrate their work and home lives to provide for their families. So what financial course will you chart?

Some key differences

On the path to financial security, it's important for women to understand what they might be up against, financially speaking:

Women have longer life expectancies. Women, on average, live 5 years longer than men.1 A longer life expectancy presents several financial challenges for women:

  • Women will need to stretch their retirement dollars further
  • Women are more likely to need some type of long-term care, and may have to face some of their health-care needs alone
  • Married women are likely to outlive their husbands, which means they could have ultimate responsibility for disposition of the marital estate

Women generally earn less and have fewer savings. According to the Bureau of Labor Statistics, within most occupational categories, women who work full-time, year-round, earn only 83% (on average) of what men earn.2 This wage gap can significantly impact women's overall savings, Social Security retirement benefits, and pensions.

The dilemma is that while women generally earn less than men, they need those dollars to last longer due to a longer life expectancy. With smaller financial cushions, women are more vulnerable to unexpected economic obstacles, such as a job loss, divorce, or single parenthood. And according to U.S. Census Bureau statistics, women are more likely than men to be living in poverty throughout their lives.3

Women are more likely to take career breaks for caregiving. Women are much more likely than men to take time out of their careers to raise children and/or care for aging parents.4 Sometimes this is by choice. But by moving in and out of the workforce, women face several significant financial implications:

  • Lost income, employer-provided health insurance, retirement benefits, and other employee benefits
  • Less savings
  • A potentially lower Social Security retirement benefit
  • Possibly a tougher time finding a job, or a comparable job (in terms of pay and benefits), when reentering the workforce
  • Increased vulnerability in the event of divorce or death of a spouse

In addition to stepping out of the workforce more frequently to care for others, women are more likely to try to balance work and family by working part-time, which results in less income, and by requesting flexible work schedules, which can impact their career advancement (and thus the bottom line) if an employer unfairly assumes that women's caregiving responsibilities will come at the expense of dedication to their jobs.

Women are more likely to be living on their own. Whether through choice, divorce, or death of a spouse, more women are living on their own. This means they'll need to take sole responsibility for protecting their income and making financial decisions.

Women sometimes are more conservative investors. Whether they're saving for a home, college, retirement, or a trip around the world, women need their money to work hard for them. Sometimes, though, women tend to be more conservative investors than men,5 which means their savings might not be on track to meet their financial goals.

Women need to protect their assets. As women continue to earn money, become the main breadwinners for their families, and run their own businesses, it's vital that they take steps to protect their assets, both personal and business. Without an asset protection plan, a woman's wealth is vulnerable to taxes, lawsuits, accidents, and other financial risks that are part of everyday life. But women may be too busy handling their day-to-day responsibilities to take the time to implement an appropriate plan.

Steps women can take

In the past, women may have taken a less active role in household financial decision making. But, for many, those days are over. Today, women have more financial responsibility for themselves and their families. So it's critical that women know how to save, invest, and plan for the future. Here are some things women can do:

Take control of your money. Create a budget, manage debt and credit wisely, set and prioritize financial goals, and implement a savings and investment strategy to meet those goals.

Become a knowledgeable investor. Learn basic investing concepts, such as asset classes, risk tolerance, time horizon, diversification, inflation, the role of various financial vehicles like 401(k)s and IRAs, and the role of income, growth, and safety investments in a portfolio. Look for investing opportunities in the purchasing decisions you make every day. Have patience, be willing to ask questions, admit mistakes, and seek help when necessary.

Plan for retirement. Save as much as you can for retirement. Estimate how much money you'll need in retirement, and how much you can expect from your savings, Social Security, and/or an employer pension. Understand how your Social Security benefit amount will change depending on the age you retire, and also how years spent out of the workforce might affect the amount you receive. At retirement, make sure you understand your retirement plan distribution options, and review your portfolio regularly. Also, factor the cost of health care (including long-term care) into your retirement planning, and understand the basic rules of Medicare.

Advocate for yourself in the workplace. Have confidence in your work ability and advocate for your worth in the workplace by researching salary ranges, negotiating your starting salary, seeking highly visible job assignments, networking, and asking for raises and promotions. In addition, keep an eye out for new career opportunities, entrepreneurial ventures, and/or ways to grow your business.

Seek help to balance work and family. If you have children and work outside the home, investigate and negotiate flexible work arrangements that may allow you to keep working, and make sure your spouse is equally invested in household and child-related responsibilities. If you stay at home to care for children, keep your skills up-to-date to the extent possible in case you return to the workforce, and stay involved in household financial decision making. If you're caring for aging parents, ask adult siblings or family members for help, and seek outside services and support groups that can offer you a respite and help you cope with stress.

Protect your assets. Identify potential risk exposure and implement strategies to reduce that exposure. For example, life and disability insurance is vital to protect your ability to earn an income and/or care for your family in the event of disability or death. In some cases, more sophisticated strategies, such as other legal entities or trusts, may be needed.

Create an estate plan. To ensure that your personal and financial wishes will be carried out in the event of your incapacity or death, consider executing basic estate planning documents, such as a will, trust, durable power of attorney, and health-care proxy.

Don't Let Rising Interest Rates Catch You by Surpise

You've probably heard the news that the Federal Reserve has been raising its benchmark federal funds rate. The Fed doesn't directly control consumer interest rates, but changes to the federal funds rate (which is the rate banks use to lend funds to each other overnight within the Federal Reserve system) often affect consumer borrowing costs.

Forms of consumer credit that charge variable interest rates are especially vulnerable, including adjustable rate mortgages (ARMs), most credit cards, and certain private student loans. Variable interest rates are often tied to a benchmark (an index) such as the U.S. prime rate or the London Interbank Offered Rate (LIBOR), which typically goes up when the federal funds rate increases.

Although nothing is certain, the Fed expects to raise the federal funds rate by small increments over the next several years. However, you still have time to act before any interest rate hikes significantly affect your finances.

Adjustable rate mortgages (ARMs)

If you have an ARM, your interest rate and monthly payment may adjust at certain intervals. For example, if you have a 5/1 ARM, your initial interest rate is fixed for five years, but then can change every year if the underlying index goes up or down. Your loan documents will spell out which index your ARM tracks, the date your interest rate and payment may adjust, and by how much. ARM rates and payments have caps that limit the amount by which interest rates and payments can change over time. Refinancing into a fixed rate mortgage could be an option if you're concerned about steadily climbing interest rates, but this may not be cost-effective if you plan to sell your home before the interest rate adjusts.

Credit cards

It's always a good idea to keep credit card debt in check, but it's especially important when interest rates are trending upward. Many credit cards have variable annual percentage rates (APRs) that are tied to an index (typically the prime rate). When the prime rate goes up, the card's APR will also increase.

Check your credit card statement to see what APR you're currently paying. If you're carrying a balance, how much is your monthly finance charge?

Your credit card issuer must give you written notice at least 45 days in advance of any rate change, so you have a little time to reduce or pay off your balance. If it's not possible to pay off your credit card debt quickly, you may want to look for alternatives. One option is to transfer your balance to a card that offers a 0% promotional rate for a set period of time (such as 18 months). But watch out for transaction fees, and find out what APR applies after the promotional rate term expires, in case a balance remains.

Variable rate student loans

Interest rates on federal student loans are always fixed (and so is the monthly payment). But if you have a variable rate student loan from a private lender, the size of your monthly payment may increase as the federal funds rate rises, potentially putting a dent in your budget. Variable student loan interest rates are generally pegged to the prime rate or the LIBOR. Because repayment occurs over a number of years, multiple rate hikes for variable rate loans could significantly affect the amount you'll need to repay. Review your loan documents to find out how the interest rate is calculated, how often your payment might adjust, and whether the interest rate is capped.

Because interest rates are generally lower for variable rate loans, your monthly payment may be manageable, and you may be able to handle fluctuations. However, if your repayment term is long and you want to lock in your payment, you may consider refinancing into a fixed rate loan. Make sure to carefully compare the costs and benefits of each option before refinancing.

Interest Rates Rise on New Federal Student Loans for 2017 / 2018

After falling for two consecutive years, interest rates on federal student loans are now rising. The following table shows the interest rates for new Direct Loans first disbursed on or after July 1, 2017, and before July 1, 2018. The rate is fixed for the life of the loan.

Subsidized vs. unsubsidized

What's the difference? With subsidized loans, the federal government pays the interest that accrues while the student is in school, during the six-month grace period after graduation, and during any loan deferment periods. By contrast, with unsubsidized loans, the borrower pays the interest during these periods. Eligibility for subsidized loans is based on financial need. Only undergraduate students are eligible for subsidized loans.

 

 

What happens if my insurance company goes out of business?

What happens if my insurance company goes out of business?

First, the Insurance Commissioner of the domiciled state steps in and corrective actions are taken. Generally in circumstances of an insurer failure, the commissioner tries to get another company to step in and take over the business. For example, American General took over AIG’s contracts back in 2001 and now pays its claims.

If that doesn’t happen then the fall back is to each state’s guaranty association, which will cover policyholder’s benefits in their states up to a specific limit. Each state guaranty association works slightly differently. Below are details for Pennsylvania and New Jersey, but if you are a resident of a different state or want more details about PA or NJ, resources can be found on the National Organization of Life & Health Insurance Guaranty Associations website.

Pennsylvania

The maximum amount of protection provided by the Pennsylvania guaranty association for each type of policy, no matter how many of that type of policy you bought from your company, is:

Life Insurance Death Benefit: $300,000 per insured life

Life Insurance Cash Surrender: $100,000 per insured life

Health Insurance Claims: $300,000 per insured life

Annuity Benefits as of Date of Insolvency:

$300,000 if contract has been annuitized

$100,000 if contract is in deferred status

Under no circumstances can the statutory obligation of the Guaranty Association exceed the contractual obligation of the insolvent insurer. There is an overall lifetime maximum per individual of $300,000.

New Jersey

The maximum amount of protection provided by the New Jersey guaranty association, for each type of policy, no matter how many of that type of policy you bought from your company, is, with respect to any one insured individual:

Life Insurance Death Benefit: $500,000

Life Insurance Cash Surrender: $100,000

Annuity Benefits (Cash Surrender Value): $100,000

Annuity Benefits (Present Value): $500,000

Health Insurance Claims: No limit

Student Loan Debt: It Isn't Just for Millennials

It's no secret that today's college graduates face record amounts of debt. Approximately 68% of the graduating class of 2015 had student loan debt, with an average debt of $30,100 per borrower — a 4% increase from 2014 graduates.

A student loan debt clock at finaid.org estimates current outstanding student loan debt — including both federal and private student loans — at over $1.4 trillion. But it's not just millennials who are racking up this debt. According to the Consumer Financial Protection Bureau (CFPB), although most student loan borrowers are young adults between the ages of 18 and 39, consumers age 60 and older are the fastest-growing segment of the student loan market.2

Rise of student debt among older Americans

Between 2005 and 2015, the number of individuals age 60 and older with student loan debt quadrupled from about 700,000 to 2.8 million. The average amount of student loan debt owed by these older borrowers also increased from $12,100 to $23,500 over this period.3

The reason for this trend is twofold: Borrowers are carrying their own student loan debt later in life (27% of cases), and they are taking out loans to finance their children's and grandchildren's college education (73% of cases), either directly or by co-signing a loan with the student as the primary borrower.4 Under the federal government's Direct Stafford Loan program, the maximum amount that undergraduate students can borrow over four years is $27,000 — an amount that is often inadequate to meet the full cost of college. This limit causes many parents to turn to private student loans, which generally require a co-signer or co-borrower, who is then held responsible for repaying the loan along with the student, who is the primary borrower. The CFPB estimates that 57% of all individuals who are co-signers are age 55 and older.5

What's at stake

The increasing student loan debt burden of older Americans has serious implications for their financial security. In 2015, 37% of federal student loan borrowers age 65 and older were in default on their loans.6 Unfortunately for these individuals, federal student loans generally cannot be discharged in bankruptcy, and Uncle Sam can and will get its money — the government is authorized to withhold a portion of a borrower's tax refund or Social Security benefits to collect on the debt. (By contrast, private student loan lenders cannot intercept tax refunds or Social Security benefits to collect any amounts owed to them.)

The CFPB also found that older Americans with student loans (federal or private) have saved less for retirement and often forgo necessary medical care at a higher rate than individuals without student loans.7 It all adds up to a tough situation for older Americans, whose income stream is typically ramping down, not up, unlike their younger counterparts.

Think before you borrow

Since the majority of older Americans are incurring student loan debt to finance a child's or grandchild's college education, how much is too much to borrow? It's different for every family, but one general guideline is that a student's overall debt shouldn't be more than his or her projected annual starting salary, which in turn often depends on the student's major and job prospects. But this is just a guideline. Many variables can impact a borrower's ability to pay back loans, and many families have been burned by borrowing amounts that may have seemed reasonable at first glance but now, in reality, are not.

A recent survey found that 57% of millennials regret how much they borrowed for college.8 This doesn't mean they regretted going to college or borrowing at all, but it suggests that it would be wise to carefully consider the amount of any loans you or your child take out for college. Establish a conservative borrowing amount, and then try to borrow even less.

If the numbers don't add up, students can reduce the cost of college by choosing a less expensive school, living at home or becoming a resident assistant (RA) to save on room costs, or graduating in three years instead of four.

1 The Institute for College Access & Success, Student Debt and the Class of 2015, October 2016

2-7 Consumer Financial Protection Bureau, Snapshot of Older Consumers and Student Loan Debt, January 2017

8Journal of Financial Planning, September 2016

Why You Need an Estate Plan for Your Digital Assets

According to the Pew Research Center, 87 percent of Americans use the Internet. This means most of us maintain at least some personal and financial information online. We pay bills online, keep contact records digitally, and rarely print a photo—because it's in our online photo album. Although this digitizing of information makes it easier to store and recall, it also presents some concerns when it comes to accounting for all of these "assets" in your estate.

What are digital assets?

First, let's define digital assets. These include your online financial accounts, your personal e-mail accounts, and your Facebook, Twitter, and LinkedIn accounts. The assets may or may not have a value. For example, you might own a domain name for your small business, which would have value, but the photos you uploaded to Shutterfly have sentimental value only.

The problem with digital assets in estate planning

With traditional estate planning, you take steps to ensure that your executor or personal representative can access the information needed to gather and safeguard your assets, contact creditors, and, if necessary, oversee your business after your passing. This can be especially challenging with digital assets, however, if you do not arrange the proper authorization ahead of time.

Your executor should be able to access information on your computer's hard drive relatively easily with the help of a technician. But this may not be the case for online accounts and data stored remotely. Even if you give your usernames and passwords to your executor or a family member, he or she may run up against service-agreement limitations that deny him or her the ability to access, manage, distribute, copy, delete, or even close accounts. Further, "unauthorized use" laws can lead to legal issues for your representatives if they are deemed to have exceeded permissible access levels.

New legal statute may ease access concerns

Fortunately, lawmakers are starting to pay attention. A new statute, the Revised Uniform Fiduciary Access to Digital Assets Act (RUFADAA), addresses whether and how a family member, executor, attorney-in-fact, or trustee can access digital assets. Sixteen states have already adopted RUFADAA: Arizona, Colorado, Connecticut, Delaware, Florida, Idaho, Indiana, Maryland, Michigan, Minnesota, Nebraska, Oregon, Tennessee, Washington, Wisconsin, and Wyoming. The hope is that more will soon follow.

RUFADAA is different from state laws governing estate administration, powers of attorney, and trusts. It does not presume that family members and fiduciaries can access digital assets because of their relationship with the account owner. Instead, the statute requires express authorization before anyone—family member or fiduciary—may access the content of a digital asset.

So what can you do now to start organizing your digital assets?

  • Decide how you want your online life handled after your death. Facebook, for example, allows a personal administrator or immediate family member to close the account or "memorialize" it. This may help ease your loved ones' pain during a time of grief. Consider creating instructions for a family member to do this, or something similar, on your social media accounts. You may assign different roles to different people. For example, you may decide to appoint one person as your executor and another to have access to certain social media accounts.
  • Create a comprehensive inventory of your digital assets. Be sure to store this inventory somewhere other than an e-mail account. Some e-mail providers, like Yahoo!, will close an account that has been inactive for several months and delete the e-mail history. Even if an executor promptly contacts the e-mail provider, he or she may not be able to copy important e-mails or contact lists before the account is deactivated. Back up important information elsewhere and update it regularly.
  • Don't assume your digital estate has no value. Some frequent flyer points are transferable after your death. Credit cards with cash-back feature stores are generally redeemable after your death, but only if they are claimed. Internet domain names are potentially sellable, and blogs are a form of intellectual property.
  • Consider investing in a password manager. Sites such as LastPass and Dashlane maintain a record of your online accounts and passwords in a digital safe. You can set them up to transfer the passwords to your representative at a specific event, such as your death or incapacity.

How can you ensure that fiduciaries and family members have access to your assets?  

  • Ask your attorney about inserting provisions into your will that grant your executor the authority to access your non-financial digital assets and accounts.
  • Talk to your attorney about adding language to grant your power-of-attorney agent authority to act on your behalf with your digital accounts and assets.
  • If you have assets in a trust, ask your attorney about the possibility of amending the trust agreement with language that will allow the trustee access to digital assets and accounts.
  • Check online service providers' policies on death or disability. Each provider has its own access-authorization tools, and the terms vary, so be sure you understand who can and can't access information. If the provider allows access to your executor, trustee, or power-of-attorney agent, inform these individuals where important information is stored.

One final note: Be careful if you include provisions covering digital assets in your estate planning documents and complete a provider's access-authorization tool. The provisions in the documents should match the information you give in the provider's access-authorization tool. If they don't, the provider likely will follow the instructions you gave in its access tool and not your estate plan.

© 2017 Commonwealth Financial Network®

The Trump Tax Plan: What You Need to Know

The big news today is the White House's tax plan, which proposes to cut taxes across the board, relieve millions of people from the burden of paying income taxes, and make filing much simpler and easier—all while keeping the budget in balance (or at least not making the situation worse). The question, of course, is whether it can do all it promises, and whether it stands a chance of passing.

Potential benefits

For individuals and families, the plan reduces the number of tax brackets (the highest of which is currently 39.6 percent) from seven to three, at 10 percent, 25 percent, and 35 percent. It also doubles the standard deduction, to $12,000, so married couples making less than $24,000 would not pay income taxes at all. Finally, it repeals the Alternative Minimum Tax (AMT), which was designed to ensure that higher earners pay a minimum level of taxes, and does away with the estate tax, which taxes inheritances.

From a business perspective, the proposal also offers benefits. The plan cuts the maximum corporate tax rate from 35 percent to 15 percent, a clear potential savings. The border adjustment tax, which would have raised taxes for importers, is nowhere to be seen—another advantage for many businesses. Finally, pass-through businesses, including many small companies, would get a 15-percent tax rate.

All in all, for many taxpayers, the plan looks like a real win.

Potential costs

It would also come with substantial costs, however. To pay for the cuts, the administration would eliminate all tax deductions, except the mortgage, charitable giving, and retirement savings deductions. Notably, residents of states with high taxes would not be able to deduct those taxes. Depending on where you live, and how many deductions you take, you might end up paying more. 

The costs at the federal level could be significant as well. Independent experts report that the plan would raise much less revenue for the country than the current tax laws do. The administration expects lower taxes to spur faster growth, making up for the shortfall, but if not, the deficit would rise substantially. The numbers here are uncertain, as the plan includes few details so far. But it does seem reasonable to conclude that, without that additional growth, the deficit would indeed grow, perhaps by a great deal.

Can it pass?

As presented, the plan allocates much of the tax relief to the wealthy, which means it will be difficult to get votes from Democrats. Eliminating the estate tax and the AMT, in particular, will make it a hard sell. On the Republican side, the possibility that the deficit could rise substantially may alienate the Freedom Caucus and other factions focused on fiscal responsibility. The internal Republican debate is likely to be lively, and the path to passage is not clear at all.

At the end of the day, the current tax plan is perhaps best described as an opening bid, laying out themes and priorities but leaving it up to Congress to fill in the details. And that is how it should be. President Trump has presented a road map for where he wants to go. Congress now has to decide how best to get there.

Although it’s worth examining the proposal as is, it is premature to get too involved, as what (if anything) emerges as law is likely to be quite different.

Authored by Brad McMillian

Can I Refinance my Student Loans

 

No, you can't refinance student loans.

However, if you have multiple federal student loans, federal consolidation of your loans may make your debt more manageable.

To be eligible for federal loan consolidation, you must have at least one federal student loan in grace, repayment, deferment, or default status. Once you consolidate your loans, you will have a single lender--the U.S. Department of Education--and a single monthly payment. The interest rate on a federal consolidation loan is fixed for the life of the loan. The rate is based on the weighted average interest rate of the loans being consolidated, rounded to the next highest one-eighth of 1% and can't exceed 8.25%.

Borrowers who opt for federal loan consolidation can choose from various repayment plans to repay their new consolidation loan, including income-driven repayment plans, extended repayment, and graduated repayment. With income-driven repayment, a borrower's monthly payment is tied to his or her discretionary income and family size, with all debt being forgiven after a certain period of years. An extended repayment option allows the term for repayment to be as long as 30 years. Although this can dramatically lower your monthly payment, it can also dramatically increase the total cost of the loan. A graduated repayment option starts off with lower monthly payments but then over time, payments increase as your income hopefully increases and you are better able to afford the higher payments.

Of course, you are always free to explore other refinancing options, such as a home equity loan or a loan against a retirement plan. However, you should explore carefully the advantages and disadvantages of these options before pursuing any one of them.

Four Ways to Double the Power of Your Tax Refund

The IRS expects that more than 70% of taxpayers will receive a refund in 2017.¹ What you do with a tax refund is up to you, but here are some ideas that may make your refund twice as valuable.

Double your savings

Perhaps you'd like to use your tax refund to start an education fund for your children or grandchildren, contribute to a retirement savings account for yourself, or save for a rainy day. A financial concept known as the Rule of 72 can give you a rough estimate of how long it might take to double what you initially save. Simply divide 72 by the annual rate you hope that your money will earn. For example, if you invest your tax refund and it earns a 6% average annual rate of return, your investment might double in approximately 12 years (72 divided by 6 equals 12).

This hypothetical example of mathematical compounding is used for illustrative purposes only and does not represent the performance of any specific investment. Fees, expenses, and taxes are not considered and would reduce the performance shown if they were included

Split your refund in two

If stashing your refund away in a savings account or using it to pay bills sounds unappealing, go ahead and splurge on something for yourself. But remember, you don't necessarily have to spend it all. Instead, you could put half of it toward something practical and spend the other half on something fun.

The IRS makes splitting your refund easy. When you file your income taxes and choose direct deposit for your refund, you can decide to have it deposited among two or even three accounts, in any proportion you want. Qualified accounts include savings and checking accounts, as well as IRAs (except SIMPLE IRAs), Coverdell Education Savings Accounts, health savings accounts, Archer MSAs, and TreasuryDirect® online accounts. To split your refund, you'll need to fill out IRS Form 8888 when you file your federal return.

Double down on your debt

Using your refund to pay down credit card debt or a loan with a high interest rate could enable you to pay it off early and save on interest charges. The time and money you'll save depend on your balance, the interest rate, and other factors such as your monthly payment. Here's a hypothetical example. Let's say you have a personal loan with an $8,000 balance, a 12% fixed interest rate, and a 24-month repayment term. Your fixed monthly payment is $380. If you were to put a $4,000 refund toward paying down your principal balance, you would be able to pay off your loan in 12 months and save $780 in interest charges over the remaining loan term. Check the terms of any loan you want to prepay, though, to make sure that no prepayment penalty applies.

Be twice as nice to others

Giving to charity has its own rewards, but Uncle Sam may also reward you for gifts you make now when you file your taxes next year. If you itemize, you may be able to deduct contributions made to a qualified charity. You can also help your favorite charity or nonprofit reap double rewards by finding out whether your gift qualifies for a match. With a matching gift program, individuals, corporations, foundations, and employers offer to match gifts the charitable organization receives, usually on a dollar-for-dollar basis. Terms and conditions apply, so contact the charitable organization or your employer's human resources department to find out more about available matching gift programs.

irs.gov

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Financial Network is notresponsible for their content anddoes not guarantee their accuracy
or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances withyour representative.Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal agency. Securities and advisory services offered through Commonwealth Financial Network,® Member FINRA/SIPC, aRegistered Investment Adviser.Fixed insurance products andservices offered through CES.

 

 

2016 Tax Due Date Approaches

Due Date Approaches for 2016 Federal Income Tax Returns

Tax filing season is here again. If you haven't done so already, you'll want to start pulling things together — that includes getting your hands on a copy of last year's tax return and gathering W-2s, 1099s, and deduction records. You'll need these records whether you're preparing your own return or paying someone else to do your taxes for you.

Don't procrastinate

The filing deadline for most individuals is Tuesday, April 18, 2017. That's because April 15 falls on a Saturday, and Emancipation Day, a legal holiday in Washington, D.C., is celebrated on Monday, April 17. Unlike last year, there's no extra time for residents of Massachusetts or Maine to file because Patriots' Day (a holiday in those two states) falls on April 17 — the same day that Emancipation Day is being celebrated.

Filing for an extension

If you don't think you're going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 16, 2017) to file your federal income tax return. You can also file for an extension electronically — instructions on how to do so can be found in the Form 4868 instructions.

Filing for an automatic extension does not provide any additional time to pay your tax! When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don't pay the amount you've estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Note:  Special rules apply if you're living outside the country or serving in the military and on duty outside the United States. In these circumstances you are generally allowed an automatic two-month extension without filing Form 4868, though interest will be owed on any taxes due that are paid after April 18. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?

One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there's no way that you can pay what you owe, file the return and pay as much as you can afford. You'll owe interest and possibly penalties on the unpaid tax, but you'll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).

Expecting a refund?

The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, beginning this year, a new law requires the IRS to hold refunds on all tax returns claiming the earned income tax credit or the refundable portion of the Child Tax Credit until at least February 15.1

Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a return.1 IRS.gov (IR-2016-117, IRS Urges Taxpayers to Check Their Withholding; New Factors Increase Importance of Mid-Year Check Up, August 31, 2016)

The accompanying pages have been developed by an independent third party. Commonwealth Financial Network is not responsible for their content and does not guarantee their accuracy or completeness, and they should not be relied upon as such. These materials are general in nature and do not address your specific situation. For your specific investment needs, please discuss your individual circumstances with your representative. Commonwealth does not provide tax or legal advice, and nothing in the accompanying pages should be construed as specific tax or legal advice.  Securities and advisory services offered through Commonwealth Financial Network,® Member FINRA/SIPC, a Registered Investment Adviser. Fixed insurance products and services offered through CES Insurance Agency.

This communication is strictly intended for individuals residing in the state(s) of CA, DC, DE, FL, GA, LA, MD, NJ, NY, NC, PA and TX. No offers may be made or accepted from any resident outside the specific states referenced.

Prepared by Broadridge Investor Communication Solutions, Inc. Copyright 2017.

 

Decisions, Decisions: Choosing Among Retirement Plan Contribution Types

Decisions, Decisions: Choosing Among Retirement Plan Contribution Types

If your employer-sponsored 401(k) or 403(b) plan offers pre-tax, Roth, and/or non-Roth after-tax contributions, which should you choose? How do you know which one might be appropriate for your needs? Start by understanding the features of each.

Pre-tax: For those who want lower taxes now

With pre-tax contributions, the money is deducted from your paycheck before taxes, which helps reduce your taxable income and the amount of taxes you pay now. Consider the following example, which is hypothetical and has been simplified for illustrative purposes.

Frank earns $2,000 every two weeks before taxes. If he contributes nothing to his retirement plan on a pre-tax basis, the amount of his pay that will be subject to income taxes will be the full $2,000. If he was in the 25% federal tax bracket, he would pay $500 in federal income taxes, reducing his take-home pay to $1,500. On the other hand, if he contributes 10% of his income to the plan on a pre-tax basis — or $200 — he would reduce the amount of his taxable pay to $1,800. That would reduce the amount of taxes to $450. After accounting for both federal taxes and his plan contribution, Frank's take-home pay would be $1,350. The bottom line? Frank would be able to invest $200 toward his future by reducing his take-home pay by just $150. That's the benefit of pre-tax contributions.

In addition, any earnings made on pre-tax contributions grow on a tax-deferred basis. That means you don't have to pay taxes on any gains each year as you would in a taxable investment account. However, those tax benefits won't go on forever. Any money withdrawn from a tax-deferred account is subject to ordinary income taxes, and if the withdrawal takes place prior to age 59½ (or in some cases, age 50 or 55), you may be subject to a 10% penalty on the total amount of the distribution.

Roth: For those who prefer tax-free income later

On the other hand, contributing to a Roth account offers different benefits. Roth contributions are considered "after-tax," so you won't reduce the amount of current income subject to taxes. But qualified distributions down the road will be tax-free.

A qualified Roth distribution is one that occurs:

  • After a five-year holding period and
  • Upon death, disability, or reaching age 59½

Distributions of Roth contributions are always tax-free because they were made on an after-tax basis. And distributions of earnings on those contributions are tax-free as long as they're qualified. Nonqualified distributions of earnings are subject to regular income taxes and a possible 10% penalty tax. If, at some point, you need to take a nonqualified withdrawal from a Roth account — due to an unexpected emergency, for example — only the pro-rata portion of the total amount representing earnings will be taxable.

In order to meet an unexpected emergency financial need of $8,000, Holly decides to take a nonqualified hardship withdrawal from her Roth account. Of the $20,000 total value of the account, $18,400 represents after-tax Roth contributions and $1,600 is attributed to investment earnings. Because earnings represent 8% of the total account value ($1,600 ÷ $20,000 = 0.08), this same percent of Holly's $8,000 distribution — or $640 ($8,000 x 0.08) — will be considered earnings subject to both income taxes and a 10% potential penalty tax.

Keep in mind that tapping your account before retirement defeats its purpose. If you need money in a pinch, try to exhaust all other possibilities before taking a distribution. Always bear in mind that the most important benefit of a Roth account is the opportunity to build a nest egg of tax-free income for retirement. Finally, not all plans allow in-service withdrawals.

After-tax: For those who are able to exceed the limits

Finally, some 401(k) and 403(b) plans allow you to make additional, non-Roth after-tax contributions. This plan feature helps those who want to make contributions exceeding the annual total limit on pre-tax and Roth accounts (in 2017, the limit is $18,000; $24,000 for those age 50 or older).1 As with a traditional pre-tax account, earnings on after-tax contributions grow on a tax-deferred basis.

If this option is offered (check your plan documents), keep in mind that total employee and employer contributions cannot exceed $54,000, or $60,000 for those age 50 or older (2017 limits).

Another benefit of making after-tax contributions is that when you leave your job or retire, they can be rolled over tax-free to a Roth IRA, which also allows for potential tax-free growth from that point forward. Some higher-income individuals may welcome this potential benefit if their income affects their ability to directly fund a Roth IRA. [In addition to rolling the proceeds to a Roth IRA, you may also (1) leave the assets in the original plan (if allowed), (2) transfer assets to a new employer's plan (if allowed), or (3) withdraw the funds.] 2

Which to choose?

Determining which types of plan contributions to make is a strategic decision based on your household's needs and tax situation. Because non-Roth after-tax contributions are generally most appropriate only to those who wish to exceed the contribution limits on pre-tax and/or Roth accounts, it may be best to focus on maxing out those accounts first.

If your plan offers both pre-tax and Roth contributions (check your plan documents), the general rule is to consider whether you will benefit more from the tax break today than you would in retirement. Specifically, if you think you'll be in a higher tax bracket in retirement, Roth contributions may be more beneficial in the long run.

Also, regardless of whether you choose pre-tax or Roth contributions, be sure to strive for contributing at least enough to receive any employer match that may be offered. Matching contributions represent money that your employer offers to help you pursue your savings goal. If you don't contribute enough to take advantage of the full amount of the match, you are essentially turning down free money.

Keep in mind that employer matching contributions are made on a pre-tax basis. Distributions representing employer matching dollars and related earnings will always be subject to regular income taxes and a potential 10% tax penalty if distributed prior to age 59½ (or, in some cases, age 50 or 55).3

Once the annual contribution limit has been reached for pre-tax and/or Roth contributions, it may be time to consider non-Roth after-tax contributions if your plan permits them.

For more information specific to your situation, consult a qualified tax professional. Working with a tax professional cannot guarantee financial success.

Section 403(b) plans may allow employees with 15 or more years of service to make special catch-up contributions in addition to the age 50 catch-up contribution. Under this special rule, the maximum additional catch-up contributions in any year is $3,000 and the lifetime aggregate special catch-up contribution is $15,000.

Keep in mind that distributions of earnings on non-Roth after-tax contributions will be subject to regular income taxes and possibly penalty taxes if the money is not rolled over to a traditional IRA. IRS Notice 2014-54 clarifies the rules regarding rollovers of non-Roth after-tax plan contributions to a Roth IRA.

Employer matching contributions may be subject to a vesting schedule. Plan participants earn rights to the employer matching contributions, and earnings on those contributions, over a period of time. Employer matching contributions are not offered in all plans. Check your plan documents.