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By Justin Fundalinski, MBA | October 15, 2015


October in the office is synonymous for Medicare.  Open enrollment is discussed rather frequently considering it begins on October 15th and certainly could impact any of our clients who are on Medicare. This month however, I would like to diverge into something that is likely to have a big impact in the long run.  Ever heard of MACRA? How about the Doc Fix Bill?  Well, the Medicare and CHIP Reauthorization Act (a.k.a MACRA, a.k.a. Doc Fix) was passed in an overwhelming Senate and House majority (92 to 8 and 392 to 37, respectively) in essence to prevent a pay cut to physicians, to keep physicians from dropping Medicare as an insurance provider, and to add funding to Medicare.

One Sentence Summary of MACRA:

MACRA is a new law that is intended to replace the current payment system for physicians from a quantity based payment structure to a quality of care payment structure with provisions that increase Medicare premiums paid by beneficiaries to help offset the costs that come along with the new system.

How the changes from quantity to quality based payments rolls out in the end will be subject to scrutiny over the coming years with likely opposition to the final structure from both physicians and Medicare beneficiaries.  However, there are some pretty clear estimates of how premiums will be impacted and some indirect effects to people’s premiums when this law is viewed in conjunction with the Affordable Care Act (a.k.a ACA or ObamaCare)

The Obvious:

Medicare premiums are based off of income levels. For instance, currently single individuals with $85,000 or less in Modified Adjusted Gross Income  (MAGI) (double this figure for married couples) pay a “standard premium” of about $105 monthly for their Medicare premiums. What this means is that if you make $85,000 or less you pick up 25% of your health insurance premium and the government picks up the other 75% (much like when you work for an employer you pay a part of the health care premium and your employer pays a part of it).  Anyone who makes more than this will pay more than the standard premium of 25%, and the amount they pay depends on how much more they make.  These are called income related premiums and depending on your income you will pay 35%, 50%, 65% or 80% of the premium.

The new law clearly makes some changes to this and on its surface level it appears that it will only affect higher income individuals or couples. It shifts some of the thresholds around so that only those that make over $133,500 (double for couples) will be impacted by premium increases caused by the law (remember this is on top of any normal premium increases that all Medicare beneficiaries are affected by).

An easy way to think about this is that some of the higher income earners that used to pay 50% of the total premium will now have to pay 65% and similar adjustments are made all the way up to the top where more people will be paying 80% of the total premium. Below you will find a chart from ObamaCare Facts that illustrates all of these bracket changes if you are interested in more details (I have put the changes in bold for easier reading).

Current MAGI limits Premium percentage MAGI limits beginning in 2018 Premium percentage
Less than or equal to $85,000* 25% Less than or equal to $85,000* 25%
Greater than $85,000 and less than or equal to $107,000* 35% Greater than $85,000 and less than or equal to $107,000* 35%
Greater than $107,000 and less than or equal to $160,000* 50% Greater than $107,000 and less than or equal to $133,500* 50%
Greater than $160,000 and less than or equal to $214,000* 65% Greater than $133,500 and less than or equal to $160,000* 65%
Greater than $214,000* 80% Greater than $160,000* 80%

*Limits for married couples are twice the limits listed here. Starting in 2020, all income thresholds will be updated (indexed) annually for inflation. 

The Not So Obvious:

Unfortunately, the percentage of people that must pay income related premiums is forced to increase due to the Affordable Care Act.  Currently, the brackets that were discussed above have been frozen since 2011, they will not be adjusted due to normal inflation, and are intended to remain frozen until 2019 (cross our fingers it does not get pushed out any further).  This “freezing” causes the brackets to remain the same while people’s income naturally grows due to inflation adjustments. So what is the effect of this?  Well, a Kaiser Family Foundation study estimated that between 2013 and 2019 the percentage of Medicare beneficiaries that must pay income related premiums will nearly double from 4.6% to 8.3%.  Undoubtedly, some groups of people are now going to be pushed above the $133,500 bracket and be directly affected by MACRA.

The Even Less Obvious:

A little off topic from MACRA but a perfect transition from the previous paragraph; because most readers of this will probably not care too much about the premium increases since they do not have a Modified Adjusted Gross Income greater than $133,500 (double for couples) there is a hidden affect that is often overlooked.  What people are missing is a little known rule that was built to protect only those that do not have income adjusted premiums.  This rule is called the hold harmless rule and in a very general sense exists so that a raise in Medicare premiums cannot reduce the amount of Social Security income that you take home (remember premiums are subtracted from your Social Security benefit).

Well for those who are anywhere near the brink of $85,000 in annual income this hold harmless provision may quickly be stripped from you.  As stated earlier the percentage of people that must pay income related premiums is expected to nearly double by 2019.  Every person that is forced into an income related premium bracket (due to the freezing of brackets under the Affordable Care Act) will lose the hold harmless provision that protected their Social Security take home pay from ever decreasing.

What does this mean?  Well, Social Security benefits inflate at a rate much slower than Medicare premiums so it is quite possible that Social Security benefits will be chewed up by Medicare premiums for anyone that was forced into these higher brackets.  When could this happen?  Really it could happen any time a Medicare premium increase is greater than the cost of living adjustment for Social Security.  It is not likely to have a substantial impact in the near future because Medicare premiums are not a large percentage of Social Security benefits. However, many years down the road when Medicare premiums have inflated to levels substantially higher than today significant impacts to Social Security benefits may be realized.  What’s the likelihood that this occurs? Who knows what the future holds, but historically it happened as recently as 2010, 2011, 2013, and is likely to happen again in 2015.

What Does It All Mean?

When it comes to MACRA the proof will be in the pudding when doctors implement the quality of care based payment structure and abandon the current quantity of care structure.  That is, having less doctor’s visits and better care given sounds great to me, but let’s not assumes this patch is the panacea to an already broken Medicare system.  Time will tell and more patches will be applied over the years to Medicare as well as this specific law itself.

When it comes to the ACA’s freezing of the Medicare income brackets (another patch), what’s done is done and more people will be paying income related premiums and losing the hold harmless provision that protects their take home Social Security from ever going down.  Something to keep an eye on is whether or not the freezing of the Medicare income brackets gets extended beyond 2019 and forces even more people into income related premiums.


Last Chance to Undo a Roth Conversion

By Justin Fundalinski, MBA | September 15, 2015

Roth conversion

As a client of ours, a radio show listener, or someone who just happens to get our newsletter, it is very likely that you have heard many appealing reasons to convert your Traditional IRA to a Roth IRA. Considering that the October 15th IRS deadline to “undo” Roth conversions is upon us (technically the IRS calls it “Recharacterization” of Roth Conversions”) this month’s post will review some reasons why you may want to reverse some of your Roth Conversion as well as discuss a few mistakes that are often made.

Reasons for a Roth Conversion

You don’t want to pay the taxes:

Often, when one initially converts from a Traditional IRA to a Roth IRA, the exact amount that should be converted is unknown because tax implications are not yet clear. So you may end up converting too much, causing a tax impact that is more than you can handle.  Tax impacts could include not only more taxes paid, but could also cause your adjustable gross income to crest above thresholds for certain tax credits and/or financial aid.  Other times one may just decide they don’t want to pay the taxes that are caused by the conversion.  In either case you can undo a Roth Conversion and save on taxes for the current year.

Your account value dropped:

Another common reason to recharacterize is because your account value has dropped significantly since the conversion.  A quick downturn in the markets can cause an account value to drop markedly.   Such an event will cause you to pay taxes on a converted value that is significantly higher than the current actual value of the assets.   For example, if you converted $15,000, but after a market drop your account value is now $10,000 you will have paid taxes on $15,000 for something that is now only worth $10,000.

Recharacterization Mistakes

The amount your recharacterize is not the amount you transfer back:

When you decide to recharacterize a certain dollar amount for tax purposes, the actual amount that you transfer back to a Traditional IRA will be different.   Why?  Well, there will most likely be gains or losses on the holdings that you originally converted to a Roth IRA and the IRS treats a recharacterization as if the conversion never took place. So, any gains or losses must be reflected in the amount that is transferred back to an IRA.  Continuing the example above, if you converted $15,000 that is now worth $10,000 you would recharacterize $15,000 but only transfer $10,000 back to a Traditional IRA.  Seems simple enough, but when you have multiple assets that have gains and losses this simple math can get rather complicated.

You cannot flip flop:

If you’re feeling savvy, after reading the last paragraph you may be thinking that it would be beneficial to recharacterize so you don’t pay taxes on the $15,000 and then immediately turn around and convert the $10,000 back to a Roth IRA.  Well unfortunately you cannot do this without waiting a specific period of time.

The IRS says that you cannot reconvert the amount that you recharacterized until the later of 30 days after the recharacterization, or the year following the year of the original conversion.  For the most part, people tend to recharacterize in the year after the original conversion so generally the 30 day rule will be what applies. However, if you happen to be recharacterizing in the same year that you converted then the year following rule will apply.   On a sidebar, this rule applies only to the amounts that you recharacterize; you are free to convert other amounts without meeting this rule.

It is not a DIY project:

The recharacterization has to be via a Trustee to Trustee transfer.  You cannot do it yourself by using the 60 day rollover rule to recharacterize your IRA.  Simply put, the Traditional IRA Custodian has to request the transfer of funds on your behalf.

In summary, you can see that there are sometimes reasons to convert back to a Traditional IRA and plenty of traps along the way.  We recommend that you work with a professional that has experience and working knowledge of recharacterizations. More often than not, a CPA can help you figure out how much to recharacterize and a financial planner can help you with the actual action of getting it done correctly.  As always, if you have any questions on this topic we are here to help.


Custodial IRA

By Justin Fundalinski, MBA | August 15, 2015

custodial IRA

Helping Kids Retire

Here at the office we talk a lot about Roth IRAs and the benefits of tax deferral and exemption.  However, much of the benefits derived from tax deferral are demonstrated the longer taxes are deferred and the longer the account is allowed to grow.  Of course, some variation of this concept has been drilled into many of us over and over.  I remember countless times that my mother, father, aunt or uncle told me to always save X% of my check and I will set myself up for retirement.  But who really understands the concept of the time value of money when they are 16, let alone ever?  Mix that with tax deferral, inflation, and a bunch of meaningless letters and numbers (IRA, ROTH, 401k, etc…) and I figured I may as well play it safe and deposit that money into a savings account earning next to nothing.  Well therein lies the problem!  I didn’t have any guidance outside of “save for retirement.”  This article is put together to introduce custodial Roth IRAs and describe how you can truly help a child save for retirement.

Contributing to a Custodial IRA

Anytime a child earns income they can contribute to an IRA[1], however they cannot set this IRA account up on their own if they are under the age of 18 (age is different is some states).  This is where the adult comes in.  You can simply open up what is called a custodial IRA on their behalf.  As the custodian you govern (but do not own) this account until your child’s 18th birthday – at which time the custodial IRA is turned over to the child.   While the money is in a custodial IRA it is a perfect time to start the education on retirement savings, IRAs, and the effects of compounded earnings.

Traditional IRA or Roth IRA?

There are Traditional and Roth Custodial IRA options that can be used; however we recommend that a Roth account be used. The primary reason is that generally children under the age of 18 are in the lowest tax bracket that they will ever be in (if any at all), negating any argument of the upfront tax savings that Traditional IRA advocates may have.   Also, we feel that the very favorable tax treatment of Roth IRAs makes them subject to major changes or even possibly elimination in the distant future as laws are passed to generate more tax revenue (think of it as a – “take advantage while you can”- attitude). Talking about these things to a 16 year old may have little impact, but doing it and getting that IRA statement in the mail may just start to engrain the concepts and the desire to save.

The Value of Time

Another fascinating thing to discuss is what that investment in a Roth IRA could potentially do.  As a quick example, say for instance your 16 year old child earns $6,000 working part time at the local grocery store.  You convince them to stash away $1500 by matching their contribution dollar for dollar (or maybe grandpa does J).  So, $3,000 total is contributed at age 16.  That single investment growing on average at 7% could turn into over $80,000 when they are 65 and looking to retire.  Not only is there now the potential for over $80,000, because this is a Roth account all of this money can be withdrawn tax free!

Discouraging Withdrawals

As we know sometimes we need money for other things.  Notably, the child should be made aware of the penalties that are built into IRAs if the money is withdrawn at the wrong time.  These are great talking points to have with the child to discourage withdrawals.  Specifically, with Roth IRAs you can withdraw your contributions any time without any taxes or penalties.  The earnings however, can only be taken without taxes or penalties if they are withdrawn after the account has been  open for 5 years and the IRA owner is over 59½.

There are few exceptions to these rules, but some exceptions could very well apply to the child later in life. For instance, a withdrawal of up to $10,000 of earnings can be made to pay for a first time home purchase without taxes or penalty.  Or, if earnings withdrawals are used to pay for qualified education expenses there are no taxes or penalties.   Remember, these two exceptions are in regards to the earnings on the account and they can be used in conjunction with withdrawals of contributions.

We Can Help

The point of this article is to simply get you thinking of other ways to teach your kids or grandkids about saving for retirement.   On that note, not too many people are experts on this and we welcome having that conversation with you and your kin in tow.  Please feel free anytime to schedule an appointment with us for a complementary meeting to start the discussion.


[1] Interestingly enough, the actual money that is contributed does not have to be the actual income earned.  As long as there is income earned a contribution can be made to a custodial IRA up to the total amount earned or a maximum of $5,500 in 2015.  Using this to your advantage, this could be an excellent way to encourage savings.  That is, get the child to save 10% of their income in an IRA and you can “match” their contribution as long the total contributions do not exceed the previously mentioned limits.

Long Term Care vs Chronic Illness

By Justin Fundalinski, MBA | June 15, 2015

Why these designations matter to the IRS and how they can impact the cash value of your insurance policy’s benefit.
Long Term Care

Last month, we scratched the surface on pros and cons of life insurance policies that are designed as “hybrids” and have a primary purpose to provide long term care (LTC) benefits under a special long term care rider. Unfortunately, a lot of confusion is generated by life insurance policies that have long term care riders.  Some policies are termed “life insurance”, but are designed specifically to be long term care policies and have the LTC rider built right into them (hybrids).  Other policies are life insurance policies with a LTC rider that is added on (à la carte style) to the standard policy. This month we are going to dig a little deeper and explore the intricacies of these “special riders” and how one long term care rider can be very different from the next – especially when the long term care benefit was added on à la carte. There are two specific differentiators that need to be discussed so you know what to look for in a new or existing policy: how the LTC rider is filed for tax purposes, and how the rider affects the policy’s death benefit and cash value.

Fun IRS Tax Jargon:

The reality is when you buy one of these long term care riders they are an acceleration of your death benefit (and sometimes an extension of benefits beyond your death benefit). This simply means the insurance company will let you tap into your death benefit (and sometimes more) before you actually pass away if your medical condition matches certain conditions spelled out in your policy. Now you may be wondering how any money received under an accelerated death benefit will be taxed. After all, if you pass away, any life insurance death benefits received by your beneficiaries will be 100% income tax free. But an accelerated death benefit is paid directly to you while you’re living! The good news is if the sponsoring insurance company files the rider under one of two IRS approved classifications known as 101(g) or 7702B you could (there are a few exceptions) receive your accelerated death benefit payments to cover certain long-term care expenses 100% income tax free!

  1. 101(g) – Technically, if the rider is filed with the IRS under section 101(g), it will not be termed as long term care rider but as chronic illness rider. However, it is often thought of as a long term care rider because “chronic illness” can have very similar eligibility criteria as defined under HIPPA long term care eligibility guidelines.  The major differentiator is that keyword “chronic”.  Your condition must be permanent in order to receive these benefits. With a traditional long-term care insurance policy under Federal HIPPA guidelines your condition need only last at least 90 days to be defined as long term care and pay your benefits. For example, if you needed a hip replacement and as a result you needed assistance in your home for several months after your operation a 101(g) “chronic illness” rider would not pay any benefits because your condition is not permanent. However, if you suffered a condition that put you in a wheelchair for the rest of your life, your condition is now “chronic” and the rider would pay you your benefits.

Another interesting facet of a 101(g) “chronic illness” rider is how your benefits are actually paid to you.  Unlike most long-term care policies that operate under a “reimbursement” model where your benefit is paid to reimburse you for actual services you received from licensed medical providers, 101(g) riders operate under an “indemnity” model where your total eligible benefit is paid directly to you in no relation to actual services received once you qualify for benefits under the provisions of your policy. (There are more facets to this payment model than we are reviewing in this article. Talk with your insurance agent and tax advisor for specifics on this 101(g) indemnity model and how benefits paid may be taxed.)

  1. 7702B – This insurance rider is as close to a true long term care insurance policy as you can get without actually purchasing a traditional long-term care policy. Any life insurance policy that directly advertises itself as having a “long term care” benefit must be filed under Section 7702B with the IRS. (A policy offering the abovementioned 101(g) chronic illness rider cannot hold itself out as offering a long-term care benefit.)

Under a 7702B filing benefits will be paid tax free for temporary or permanent long term care claims. This benefit falls in line with what most people think of as long term care.  Often, with various exceptions, these benefits are paid under a “reimbursement” model.  That is you pay a long term care bill and submit your receipts to the insurance company. However, many companies offer a coordination of benefits program where your medical service provider can submit payments directly to the insurance company without you having to pay first and wait for reimbursement.

How Your Death Benefit and Cash Value Is Affected:

Anytime you end up using one of the accelerated benefit riders discussed above remember that you are receiving your death benefit early, so every accelerated benefit you get reduces your death benefit. Of course there are various iterations of what your absolute minimum death benefit could be even after receiving all of your long term care benefits, but it all depends on the policy type and verbiage. So just remember, your long term care benefit eats away at your death benefit – there is no double dipping.

The other side of the coin is that some life insurance policies have cash value that builds in them above and beyond the death benefit.  All I can say is read the fine print (or have us read it) on how cash value is affected when an accelerated benefit is used.  We have seen long term care benefits that erode away cash values at a rate much greater than the amount of accelerated long-term care benefits actually paid out.

In conclusion, it’s important that you know your policy and that you and your family know how your policy fits into your overall retirement and long term care plan.  Don’t be intimidated by all of this. If you have questions on this topic, please feel free to contact us!

Hybrids Aren’t Just Cars – Hybrid Long Term Care Insurance Policies

By Justin Fundalinski, MBA | May 15, 2015



Hybrid Long Term Care Insurance

In the realm long term care there is undoubtedly one major push back that we frequently hear, “What if I pay all those expensive premiums and never need long term care?”  I have a one word answer to that – GOOD! Have you ever heard someone complain about their house not burning down and having to pay their property insurance year after year? Or, that they wish they broke their leg so they could have taken advantage of the medical insurance they paid?  Regrettably, “good” is sometimes not good enough of an answer and the insurance industry has created products to help offset the potential loss of premium payments.   In this month’s article I will discuss insurance products (called hybrids) that have been developed to leverage your premium(s) into long term care dollars as well as offer the opportunity to call the deal off and get your money back.

The Quick and Dirty of Hybrid Long Term Care Policies:

There are more hybrid long term care insurance products available than you shake a stick at, so trying to sort through them is no simple task.  In summary, insurance companies have taken many of the traditional long term care benefits that we are familiar with and structured them into annuity and life insurance contracts.  The way they do this is by stripping down the benefits of annuities and life insurance policies to bare bone minimums (as much as they can legally) and then allowing you to access the contract value and more (something they often call an extension of benefits) for long term care needs.  The nice part about these contracts is if you end up wanting your money back (or heaven forbid you pass away without needing long term care), your premiums are not lost!  From experience I can tell you that each insurance company tries to stand out with little tweaks to make their product stand out, therefore no two policies are the same. However, for the sake of this article let’s talk in generalities about the benefits and drawbacks of these hybrids.

The Pros:

There are many pros to hybrid long term care policies.  Here are a few to consider:

  • Return of premium – As mentioned already, your money is not lost if you do not use the insurance. When your premiums are invested into an annuity hybrid you are able to access a guaranteed minimum account value (typically equal to your premiums), and if you pass away without using the benefits your account value is passed on to your heirs.  In life insurance hybrids you are able to access your premiums through a “return of premium benefit,” and if you pass away without using the benefits your heirs receive a life insurance payment.  Note that any long term care benefit that you end up needing will reduce your account values dollar for dollar.
  • Leverage – Of course, these policies leverage your premiums into higher long term care benefits, otherwise people would just keep their money invested or in a savings account and “self-insure” if they needed to. Depending on the hybrid and the types of benefits that it offers, we have seen these policies leverage premiums by more than four times.   That is, you can make one dollar of premiums stretch into four dollars of long term care benefits.  The amount of leverage that you get will typically vary depending on how you structure your maximum monthly benefit or the tweaks that the insurance company offers (for example: a higher guaranteed death benefit will lower your total long term care benefits)
  • Fixed premiums – Generally with these policies you don’t have to worry about the insurance company hiking your premiums. You can typically pay a onetime premium or stretch your premiums for up to ten years (and with some products over a lifetime).
  • Tax benefits[1] – Insurance payments for long term care benefits are received tax free as long as they do not exceed maximums set forth under HIPPA guidelines.

The Cons:

Of course, there are many downsides to these policies. These include:

  • Lack of growth/opportunity – Undoubtedly, your returns will be meager if anything at all. Annuity hybrids often offer some guaranteed rate of return, but any gains you are credited will be chewed up by rider fees that leverage your premiums into long term care benefits. Life Insurance hybrids just don’t buy you much life insurance.  Indisputably, any premium you pay loses the opportunity to be invested elsewhere and what you get in return is a leveraged long term care benefit rather than principal growth or large death benefits.
  • Steep premiums – While fixed premiums are a benefit of these policies, most of them require that you pay your full premium upfront or over ten years rather than paying for it over your lifetime. Basically what this means is that you have to pay large premiums from your assets rather than smaller premiums from your income, which leads into the next con of these policies.
  • Not very IRA friendly – If you simply wanted purchase one of these hybrids with funds from your IRA you will have to take a distribution from your IRA. That is, you will get hit with ordinary income taxes, possibly a higher tax bracket because these premiums are typically large outlays, and if you are under 59½ you will be penalized for early withdrawal from your IRA. Yes, there are a few new annuity hybrid polices that allow for IRA funds to be used as a premium, however there are many caveats that come along with taxes and Required Minimum Distributions that make these so called IRA friendly hybrids less attractive and more complicated.
  • Possible penalties – Some of these policies will not allow you to take your full return of premium until the contract has been open for a specific period of time. It’s important to look at the penalty schedules so you understand how this works.
  • Need for underwriting – For the most part these policies have an accelerated underwriting, however you still have to go through a medical underwriting (even with the annuity hybrids). Rather than trying to estimate your life expectancy (as they do with life insurance underwriting) they are trying to estimate if and how long will you need long term care services.  Depending on the insurance company and your age you will have to go through a phone or in person interview where they ask general health history questions and test for cognitive impairment.  They will also order up your medical records and prescription history to help them understand your medical condition.

Key Takeaways:

Designed As Long Term Care Insurance

If there is one thing to take away from this article it is that these annuity and life insurance hybrids really are not intended to be used for the benefits that annuities and life insurance are known for.  These products are designed and should only be used for insuring the likely possibility of needing long term care. They are long term care policies in the guise of annuities and life insurance.  If you want the benefits of annuities, don’t by a hybrid.  If you want the benefits of life insurance, don’t by a hybrid.  If you want the benefits of long term care insurance, a hybrid is one of the many options.

Not Investments

Next, takeaway is that these are not investments.  With these hybrids insurance companies will protect your premiums and allow you to access them, but these policies should not be considered an investment and you will likely not see any gains to your principal.  If you are considering a hybrid long term care policy you should only be thinking about using the return of premium benefit for a worst case scenario or as a return of premium at your death. Any draws on your premium will reduce your long term care benefits, as well as open up the chance that your policy could lapse entirely.

Life Insurance With LTC Riders Are Not Hybrids

Finally, there are life insurance policies that have long term care riders that are really not long term care hybrids.  Depending on how the rider benefit is filed with the state, the policy may have a long term care benefit that is based on the standard triggers under HIPPA guidelines or you may have a long term care benefit that is based on what insurance carriers call a chronic illness.  Without getting into the gritty details, both benefits would be triggered if you are unable to perform two of six activities of daily living for more than 90 days. However, if your long term care benefit is based on you having a “chronic illness,” any chance that you may recover from your health condition (i.e. hip fracture) your insurance policy will not any benefit.  We will talk more about this nuance in a future article.


[1] Note that taxes can be complex and vary depending on many different factors. In addition to the benefit listed above there are other tax benefits that may be applicable as well as times that taxes may apply to gains in the account.  This is not intended to be a guide on taxes and if you have any questions it is recommended that you discuss this further with your CPA or financial planner.


Caution: New IRA Rules (Part 2)

By Justin Fundalinski, MBA | April 15, 2015

IRA distributions

Last month I focused our monthly article on helping you understand that it is not an IRA custodian’s responsibility to give advice on how to take IRA distributions.  It was discussed how they dismiss themselves from any responsibility if a distribution is taken incorrectly and you are forced to suffer undue tax consequences. I also defined some common IRA withdrawal types that can cause confusion when taking a distribution as well as outlined the newly implemented One Rollover Per Year Rule that will throw IRA account holders for a loop in 2015.  This month’s article is a continuation on this subject and is focused on helping IRA owners proceed with caution so that the new rules do not come back to bite them at tax time.

Quick Review of the One Rollover Per Year Rule:

In 2014 a major Tax Court decision impacted indirect transfers (60-day rollovers) beginning in January 2015. The new rule states that an IRA owner can only make one indirect rollover per any 12-month period, regardless of the number of IRA’s that they own. Prior to 2015, an IRA owner could move any IRA account that they had once per 12-month period.  If you act outside of this rule you will have to include any distributed amounts as income on your tax return and if you are under age 59½ you may be subject to an additional 10% early withdrawal penalty.

Who Is Most Likely to Be Affected?

My first inclination of who is most likely to break the new rule is anyone who maintains IRA bank savings accounts or CDs. I am not intending to knock bank custodians or bank IRAs, the fact of the matter is that we are all used to doing banking business a certain way – in person.  Think about it, if you decided to move your checking accounts to a new bank, would you start by going to the new bank and telling them to transfer your funds over from the old bank? No! You would go to your old bank, close the account, get a check, walk across the street and open up a new account before the ink on the check dried.  So what happens when you do this with two or more IRA CDs?  Whoops, you just made too many indirect transfers and you are subject to the consequences of the One Rollover Per Year Rule. If you have any accounts that are IRAs make sure you simply avoid this problem by moving funds with direct transfers.

Bank CD Owners Beware!

Another reason why bank CD owners could fall victim to the new rule is because banks have their own lingo for CDs that unfortunately uses one of the same terms as an IRA distribution type – “rollover.”  When you rollover a CD (in banker terms) it means that you reached the end of your original CD term and you want to continue in a CD for the same term but at the new prevailing interest rates.  So now we have one word with two definitions that can be used to describe two completely different things that you can do with same IRA CD.  It can be the banker term as defined above or it can be the IRA distribution term as defined in the previous article.   Are my lexicographers confused yet? To make this problem simple just remember this – DO NOT ASK YOUR BANKER TO “ROLLOVER” YOUR CDs TO ANOTHER BANK. You want to ask your new bank/custodian to move your funds by means of a direct transfer.

Errors of Others

Unfortunately, mistakes with of the One Rollover Per Year Rule will be caused by the errors of others. As mentioned in last month’s article, we recently worked with someone whose IRA was at a local bank custodian. This person was simply trying to renew their existing bank IRA CD for a shorter term. Rather than keeping the existing IRA open and just buying a new shorter term CD in it, the bank’s employee completed paperwork that closed the IRA and took a full distribution! The employee then directed this distribution into a CD in a new IRA (in effect this mistake is viewed as an indirect rollover in the eyes of the IRS). To add insult to injury three months later the same bank employee made the exact same mistake again! Each “distribution” generated an erroneous 1099 from the bank which was then reported as taxable income to the IRS of nearly $400,000 on an IRA that was valued at $200,000!

The bank’s representative completed distribution paperwork for this IRA owner (common practice even though custodians technically do not give advice on how to take the distribution) and she marked the distribution type incorrectly. Of course, the IRA owner signed off on the paperwork not knowing it was completed incorrectly and technically the problem lies on the IRA owner’s shoulders. Fortunately, as of the writing of this article the bank was attempting to “fix” the problem.  We have no doubt in time they will, but it will also most likely result IRA owner receiving a “letter audit” from the IRS in a few years asking her to explain why she didn’t declare $400,000 of IRA distributions on her taxes!

In summary, whether you are moving funds from a bank custodian or from any other type of IRA custodian it just isn’t as simple as it sounds.  If you have any questions or need help with this please remember that we are here to give you guidance.  Jim is a member of the Ed Slott Master Elite IRA advisor group and will be able to help with any and all of your IRA questions.


Caution: New IRA Rules (Part 1)

By Justin Fundalinski, MBA | March 15, 2015

IRA rules

In the world of IRAs, IRA Custodians (financial intuitions that are approved by the IRS to hold such retirement accounts) have lots of responsibilities that they must uphold. However, it is not their responsibility to assure you know the differences among all the confusing terminology that revolves around IRA withdrawals/transfers and the tax consequences behind them (for example: direct transfers, indirect transfers, and distributions are all ways to take money out of an IRA and all have different tax rules).  It is up to the account holder to sign off on the reason IRA funds are leaving an account, and if you are not educated on the IRA rules that just changed in 2015, unintended tax consequences may occur.

To illustrate this point, recently at the office we saw IRA withdrawal paperwork from a bank custodian that clearly stated above the signature line, “… no tax advice has been given to me by the Custodian” and, “I assume the responsibility for any adverse consequences which may arise from this withdrawal and that the Custodian is not responsible”.  The sad thing is that a bank employee filled out the paperwork, checked the incorrect distribution type, never went over this with their client, and the client signed off unknowingly.  With all the confusing terminology as well as changing tax laws this article is intended to inspire a bit of caution to those who move IRA funds – especially those who have multiple IRAs or move their accounts frequently (i.e. IRA CD/Interest rate shoppers).

Common Withdrawal Types:

Before we get into the depths of the topic at hand, a quick overview of three common withdrawal types is necessary.

A distribution is the easiest to explain of the various withdrawal types and is when an IRA owner takes money out of their IRA.  The reason someone may want to do this varies, but typically they either have to remove funds because of Required Minimum Distributions (the IRS wants their cut) or they want to remove funds because they need the money.  Any money that is withdrawn is subject to taxes as ordinary income (just as one’s wages or interest income is) and may be subject to a 10% penalty if they are under age 59½ when they take the withdrawal.

A direct transfer is a withdrawal from one Custodian directly to another Custodian.  This is a very common way of moving an IRA to another financial institution.  Most times a direct transfer is completed electronically, however if a check is issued, it is made payable to the new Custodian for the benefit of the IRA owner and not to the IRA owner themselves. For instance, if I were transferring my IRA to ABC Custodian the check would be made payable as: ABC Custodian IRA FBO Justin Fundalinski. Under current rules there are no limits on how many direct transfers an IRA owner can complete in a year.

An indirect transfer (aka 60-day rollover) is actually a distribution (as described above) from an IRA where the check is made payable to the IRA owner so that they can then turn around and redeposit the funds into a different IRA.  With indirect transfers, the IRA owner becomes the “middleman” between the retirement account custodians; hence, it is “indirect” and they become responsible for ensuring the check makes it to next custodian.  The indirect transfer is a tax and penalty free distribution of assets as long as one adheres to the 60-day rollover rules set forth by the IRS (in short – recontribute the funds to an IRA within 60-days of receiving the original distribution).  Unfortunately the 60-day rollover rule was refined in 2015 and became much more restrictive with the one rollover per year rule.

One Rollover Per Year Rule:

In 2014 a major Tax Court decision impacted indirect transfers (60-day rollovers) beginning in January 2015. The new rule states that an IRA owner can only make one indirect rollover per any 12-month period, regardless of the number of IRA’s that they own. Prior to 2015, an IRA owner could move any IRA account that they had once per 12-month period.

So what are the consequences? If you act outside of this rule you will have to include any distributed amounts as income on your tax return and if you are under age 59½ you may be subject to an additional 10% early withdrawal penalty. This rule change will undoubtedly have negative consequences on many people, but knowing how the rule works and the distribution types discussed above it will be business as usual.

Proceed with Caution:

Since there are so many possible scenarios that this new IRA rule change could wreak havoc on, getting into such detail is beyond the constraints of this month’s article. However, because it is something that IRA owners should understand, consider this a “to be continued,” and the following paragraph a spoiler of what you can expect next month.

Coming from many years of working at a national bank and understanding more banking and IRA jargon than I like to admit to, I can assure you that the majority of IRA owners that will be affected by the new one rollover per year rule will be IRA CD/bank savings owners.  So, if you need to move around IRA funds at your local bank before you can read next month’s article please make sure you understand the rules and terminology discussed above and don’t hesitate to contact us if you have any questions.


Social Security Is a Better Deal Than You Think

By Justin Fundalinski, MBA | February 15, 2015

Social SecurityFor quite some time now there has been a movement afoot to “privatize” Social Security. The argument for privatization promotes the view that individuals would be able to generate far greater lifetime income if they did not have to contribute to Social Security. The premise is based on the belief that if workers were allowed to direct what would have been their Social Security contributions into their own investment account (perhaps a 401(k) or similar tax qualified retirement account) they could later use that money to buy a stream of guaranteed income through an income annuity and generate far greater lifetime income than currently offered through Social Security. Unfortunately, the privatization argument tends to ignore the critical difference in how Social Security calculates your lifetime stream of guaranteed income and how a private insurance company prices guaranteeing a retiree a lifetime stream of income.

This movement to privatize Social Security seems to grow in popularity when equity returns are strong. Unfortunately, concentrating solely on equity returns ignores the other half of the equation. Once you retire, current investment returns are meaningless to your cost of a guaranteed income stream. Far more important to that cost are current interest rates (more on that later).

Absent from the privatization argument is the critical difference of how Social Security calculates your lifetime stream of guaranteed income compared to how a private insurance company prices the cost of guaranteeing a retiree a lifetime stream of income. This dichotomy recently became abundantly clear when a new retiree asked us to help him calculate his retirement budget. Unique to his situation was a lack of any Social Security benefits or employer pension.  For the majority of his working years he did not contribute to the Social Security system because his employer had opted out of the program back when the government allowed certain employers to do so.  Instead, his employer allowed this person to direct what would have been contributed to Social Security into a retirement account. The employer matched the contributions and over his working years the account grew to an enviable value of more than a million dollars.

In this article we will share with you the difficulty in generating a lifetime stream of guaranteed income in today’s low interest rate environment.

Social Security VS Private Annuity – Benefit Calculations

We consider Social Security benefits and lifetime income payments from a Single Premium Immediate Annuity[1] to be “secure income.”[2]  Where they differ is how each payer determines the amount of income you will receive for the rest of your life. When you retire, the Social Security Administration bases your benefits on an index of your highest 35 years of earnings. Current interest rates have no bearing on how much your Social Security benefit will be.

On the other hand, an insurance company providing a retiree a lifetime stream of guaranteed income via an income annuity couldn’t care less how much that retiree earned while working!  Instead the insurance company will base the majority of the cost of that retiree’s income benefit on how much they think they can earn in the bond market based on current interest rates. The lower interest rates are at the time of purchase the more it will cost to buy a lifetime stream of guaranteed income.

Since 2008, interest rates have been at historic lows – and therein lies the problem for the retiree in this story.

How Much Secure Income Do You Need?

The cornerstone of our retirement planning philosophy revolves around a simple concept. Retirees should put in place an income plan that will cover 100% of their “required expenses”[3]  with a lifetime stream of inflation-adjusted guaranteed income.  The retiree in our story needs $55,000 a year of inflation-adjusted guaranteed income throughout his retirement. Normally such an amount isn’t difficult to generate because most working people have a modest amount of “secure income” such as Social Security benefits and/or employer sponsored pension income.  A retiree need only cover the difference (if any) between their secure income and their required expenses with an income annuity.  But as we mentioned before, the retiree in our story was not eligible for any Social Security or pension benefits. He now needs to use his retirement savings to buy an income annuity to cover his entire required expenses.

Pricing a Lifetime Stream of Secure Income

We helped the retiree in our story solicit quotes from insurance companies asking how much he would need to pay to buy a lifetime stream of guaranteed income for him and his wife (both are in their early 60s) beginning at $55,000 and increasing by CPI annually until mortality.  The results shocked us.  The quotes provide by various insurance companies varied between $1.3 to just over $1.5 million to secure this income stream! These quotes were more than the retiree had!

The retiree in our story had fallen victim to the Federal Reserve’s efforts to stimulate economic growth by lowering interest rates to historic levels since 2008. Had interest rates been at levels last seen just a decade ago, the cost of purchasing his lifetime income would have been significantly less. In all likelihood, his Single Premium Immediate Annuity would have cost less than half of his total portfolio.

How Much Social Security Could the Retiree Have Received?

Adding to the retiree’s difficulty was his lack of any Social Security or pension income. We cannot calculate with complete certainty what the retiree in our story would have received in Social Security benefits had his employer not opted out of the system. Nonetheless, we can come close in an estimation based on his historical earnings.  At age 66 (Full Retirement Age) this retiree would have had Social Security Retirement benefits of approximately $30,888/year.  His wife (who remained at home caring for the family and therefore did not pay into the Social Security system) would have been eligible for a spousal benefit of $15,444 at her age 66. All total the retiree in our story most likely would have been eligible for a combined Social Security benefit of $46,332/year beginning at age 66.  Furthermore, with a little planning they could have “optimized” their benefits via several claiming strategies and increased their annual Social Security benefit to $56,216 by age 70.  Whether the retiree claimed at age 66, or optimized his benefit at age 70, it is our contention that their Social Security income would have covered most, if not all, of their required expenses at the beginning of their retirement. This would have then allowed them to now use their retirement savings to fund their desired expenses[4].

So What’s Better?

When we look at all this information we have to ask a pointed question. What’s better…?

  • Having an enviable 401(k) that is valued over a million dollars without any Social Security benefit and the option to buy a secure stream of income.
  • Or, having a modest 401(k) with secure income provided by Social Security to cover required expenses.

Because our retirement planning philosophy centers on helping people cover 100% of required expenses with any combination of secure income (pension, Social Security, or income annuity) we are not biased on how the income is generated from as long as it is secure.  So the short answer to the question is – It depends where the secure income is coming from and what current interest rates are.

To be able to secure sufficient guaranteed lifetime income for our retiree in the current low interest rate environment, we demonstrated that it would cost significantly more than our retiree had saved.  Had interest rates not been at historic lows, or had the retiree been a participant in the Social Security program this would have been a very different story.

We have always liked Social Security. We specialize in helping people optimize their benefits and receive as much from the program as possible. Because Social Security bases your income benefit on your historic earnings and not current interest rates it can insulate you from the risk of retiring in a low interest rate environment. We admit Social Security is complex, it’s confusing, and it’s severely underfunded. But it remains a superb social insurance program and in our opinion a much better deal than many people realize.

[1] A Single Premium Immediate Annuity is often referred to as a “personal pension”. In exchange for a lump sum of money an insurance company will provide you a lifetime stream of guaranteed income. If you live long enough and receive all your money back payments will continue for the rest of your life. Structured properly, they will also pay your beneficiary any money not returned to you should you pass away before receiving all your money back.

[2] Our definition of Secure Income is an income stream that (1) is predetermined and known; there is no ambiguity with how much income you will receive throughout your retirement; (2) your income can never be cut, it can only increase and (3) the income is not backed by your assets alone, it is backed by a third party

[3] A Required Expense is an expense if you don’t cover you will suffer an economic, financial or medical hardship. Required Expenses by their very definition are difficult to cut or reduce and must be fully covered until mortality with inflation adjusted guaranteed income.

[4] A Desired Expense is an expense if you don’t cover you will suffer an emotional hardship. Desired Expenses by their very definition are easy to cut or reduce and therefore can be covered during retirement from your investment and savings. When market conditions are good you an increase your desired expenditures. When market conditions are bad you can cut them.

Long Term Care

By Justin Fundalinski, MBA | January 15, 2015


Long Term Care

Long term care is often misunderstood on many levels and commonly ignored when retirement plans are developed. Many times the startling realities of long term care are realized later in life and by that time planning options become very limited.  After reading this it should be clear what long term care involves, how and when care is provided, the impacts it has on others, who pays for it, and some general ideas for getting a plan in place.

What exactly is long term care (LTC)?

LTC in the medical and health insurance world has a very simple two part definition.  It is considered to be needed when:

  1. Someone cannot perform two of six activities of daily living (often known as ADLs). The six activities of daily living are commonly defined as bathing, continence, eating, toileting, dressing, and transferring (getting in or out of a bed, chair, etc…).
  2. And/or someone has a significant cognitive impairment that involves diminished capacity for judgment, memory, or orientation.

Notice that the ADLs listed above may or may not be associated with a medical condition.  Much confusion is associated with LTC because of this specifically.  It is often assumed that long term care must be given in a special facility, by a certified provider, or that it will be paid for by health insurance.  Understanding the long term care continuum will help clarify who can take care of you and where care can be given.

The Long Term Care Continuum

Depending on the level services that are needed, LTC can be provided in the home, community, or in a facility (assisted living, nursing home, etc…). Commonly, the level of services needed progresses over time; hence, LTC generally starts in the home and eventually moves into a facility if needed.  This progression from home to a facility (and some stops in-between) is the long term care continuum.  Here is a list of some of services and providers at each stop along the continuum:

  1. Home Based LTC:
    1. Personal care and homemaker services, home health care services, companion services, meal delivery, transportation services, geriatric care management, and hospice support.
  2. Community Based LTC:
    1. Adult day service programs, senior centers, respite care, and caregiver support groups.
  3. Facility Based LTC:
    1. Board and care homes, assisted living, senior retirement communities, continuing care retirement communities (blends home care and nursing care into one retirement community), skilled nursing facilities.

The key to take away from this continuum is that more often than not people want to stay in their home for as long as possible and the services available for home and community based LTC are designed to do just that until more demanding care or medical professionals are required.   Unfortunately, because a long term care plans are often neglected in the retirement planning process, people are forced through the continuum more quickly than necessary and/or their family and friends are heavily impacted by their long term care needs.

Long term care affects other people

According to a Genworth 2014 survey, their study found that the impacts of LTC on caregivers (family and friends who volunteered their time) are substantial. It illustrated that these caregivers often miss work, indicated negative impacts on their families, health and wellbeing, as well as expressed that they had a personal loss of income or spending because of this responsibility.

Long term care planning (or the lack there of) not only affects how long someone can stay at  home comfortably, but is also effects the emotional, physical, and financial impacts dealt on friends and family members that are often forced to take care the person in need.

Who pays for long term care?

To begin answering this question let’s set one common misconception straight.  Medicare does not pay for long term care.  Medicare will pay for care provided by a skilled nursing facility, for limited home health services, and for limited hospice services however very specific criteria must be met.  I am not going to get into the nuances and details of Medicare, just know that Medicare does not pay for long term care.

Medicaid on the other hand has does pay for long term care services.  Unfortunately, eligibility for Medicaid often requires asset spend downs, that a majority of income be used toward the cost of care, and may involve estate recovery.  Additionally, there are often long wait lists to get into a Medicaid LTC bed.  So, if one is okay with Medicaid’s asset and income requirements, is able to wait to get a bed (or move to a bed out of the area), and accepts the less than favorable conditions and privacy of a Medicaid facility, then Medicaid is a viable option for long term care.

Since Medicare does not pay for LTC and Medicaid LTC has unfavorable requirements, the only other ways to pay for LTC is out of pocket, through friends or family, or via insurance.

Plan for Long Term Care Needs

As mentioned throughout this article it is important make a plan for long term care needs as part of your retirement plan.  An important point to make is that long term care is not just insurance.

A good plan will consider who can help you at home and how that person will be impacted emotionally, physically, and financially.  You will want to consider your own dignity on how and where care will be provided as you progress though the LTC continuum.  And finally you will want to plan financially so that your retirement goals are not deteriorated by a long term care event.

There is a lot involved in this planning process, and as always we are here to help.  Please let us know if you have any questions or comments on this article by giving us a call at 970-530-0556

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