Fong Law Group

Tips to Boost Your Tax-Free Income in Retirement

“Although workers are told to put every spare pre-tax cent into a traditional 401(k) at work, the reality is that once the time comes to tap that account for income in retirement, income taxes will follow.”

There is a bright side to the income taxes that will follow you into retirement. Create a pool of tax-free income, advises CNBC, by following the advice in the article “3 tips to help boost your tax-free income in retirement.”

Introduce yourself to the Roth IRA and the Roth 401(k). Unlike a traditional IRA, with a Roth IRA you pay taxes when you make your contribution to the account. The funds then grow tax-free over time and, as long as you meet certain conditions, there are no taxes on withdrawals. With a Roth IRA, there are none of those pesky RMDs (Required Minimum Distributions). However, there are withdrawal distribution requirements for a Roth (401)k.

Most employers offer Roth IRA and Roth 401(k) accounts, so there’s a good chance they are offered by your employer.

Roth IRAs are often offered along with their counterpart, the traditional 401(k). Between the two of them, it’s possible to save as much as $19,000 in 2019. For those workers who are 50 and over, you can add $6,000 as a catch-up contribution.

The power of the Roth 401(k) is the tax-free compounding that takes place over time. Don’t miss out on this, if you want to max out your tax-free savings.

There are two different types of Roth plans: the Roth 401(k) and a Roth IRA. Roth IRA plans have income limits. If your modified AGI (Adjusted Gross Income) is more than $137,000 for a single and $203,000 for a couple filing jointly, you aren’t allowed to make a direct contribution to a Roth IRA. However, there are no income caps for Roth (401)k. You can also save more for retirement in a Roth 401(k), compared to a Roth IRA. Roth IRAs are also subject to annual contribution limits: $6,000 in 2019, plus a $1,000 catch-up contribution, if you are over age 50.

Here are three steps to make your retirement savings more tax free:

Can you do an in-plan conversion? If your employer offers a Roth 401(k), you may be able to convert some of your traditional 401(k) savings to the Roth. This is called an in-plan Roth conversion. Just like a direct contribution to a Roth 401(k), it will be taxable. Therefore, make sure that you run the numbers before moving funds. You’ll be responsible for taxes on pretax principal and earnings. Don’t do it all at once, so that you don’t find yourself moved into a higher tax bracket.

What does your plan allow? If you’ve left your employer and have money in both a traditional 401(k) and a Roth (401)k, you might want to convert those accounts — if your retirement plan allows it.  Remember that you may not write a check from an outside bank account to add after-tax money to a Roth 401(k).

What’s your time-frame? Just as young workers are in the best position to save early and often, they are also in the best position to make the most out of Roth savings accounts of all types. It’s likely that younger workers have not yet reached their full career and earnings stage, so now is the best time to put money into a Roth 401(k). When incomes are higher, so will taxes on Roth retirement account contributions. If you’re close to retirement, there are other timing factors to consider, primarily Medicare. How much you pay for Medicare Part B and D, which covers doctor’s visits and prescription drugs, depends upon your modified gross income from two years ago. Do the conversion to a Roth at age 62, if you intend to file for Medicare at age 65.

Reference: CNBC (Feb. 10, 2019) “3 tips to help boost your tax-free income in retirement”

 

Will the 2019 Social Security COLA Make a Difference?

“The nation’s 67.6 million Social Security beneficiaries will receive a 2.8% cost of living (COLA) increase next year, the Social Security Administration announced recently. That translates to a monthly boost of $39, to a total of $1,461 for the average beneficiary.”

It may sound like a fair increase, but it won’t amount to much, since the COLA (Cost of Living) increase will quickly be gobbled up by an increase in health care costs. That’s according to Next Avenue’s recent article titled “The Truth About 2019’s Social Security Cost-of-Living Increase.”

Social Security beneficiaries should not expect to see much in the way of an increase in their monthly checks. That’s despite receiving the highest COLA in seven years. Why aren’t more people upset by this?

The Department of Health and Human Services, which oversees Medicare, could have held its 2019 Part B premiums at the same level they are today but that might have been seen as a political move.

There is a Social Security rule that says benefits may not decline from one year to the next, including the impact of increases of Part B premiums. In the past, annual COLAs were normally large enough for people to pay the higher Part B premium and still see an increase in their Social Security benefits. However, since 2009 there have been three years with a zero COLA, and one year it was only 0.3%. In those years, the hold-harmless rule was invoked, and many people did not have to pay those Part B premiums.

Last year’s 2% COLA permitted Medicare to catch up. Many people saw most, if not all, of their 2% increase used to pay higher Part B premiums. Those with higher benefits were paying full Part B premiums last year. This year, almost all of the COLA will go toward paying higher benefits. However, people with lower Social Security benefits who were paying below normal Part B premiums, will now see a larger share of their COLA used to restore their Part B benefits to the level that most people pay.

What can be done to help this program, which helps the most vulnerable elderly citizens?

The hope would be to make benefits more progressive, helping workers with lower earnings at a higher rate than those with higher earnings. However, unless funds come from the higher earners, Social Security would become even more expensive than it is.

Social Security supporters have worried that any movement away from the system now in place toward something that would favor the neediest, would undermine any existing support for Social Security.

Reference: Next Avenue (Oct. 24, 2018) “The Truth About 2019’s Social Security Cost-of-Living Increase.”

Financing Assisted Living by Saving, Planning and Insurance

“In March 2018, the U.S. Census Bureau reported that by 2030, all baby boomers will be over the age of 65, leading to a unique situation in demographics: 20% of U.S. residents will be at retirement age.”

Part of the increase in the number of people who live long enough to be of retirement age, is because life expectancies have increased. The average U.S. life expectancy has increased from 68 years in 1950 to 79 years in 2013, according to the Population Reference Bureau cited in an article from U.S. News & World Report titled “How Should I Finance Assisted Living?”

The combination of increasing life expectancies and improvements to healthcare, means that more people are living longer after they stop working. This has led to a financial crisis for many Americans: how can they pay for the increased cost of healthcare and assistance needed, as they enjoy these additional years, and in some cases, decades.

It’s like a math problem. If you retire at age 65 and need to enter an assisted living facility 10 years later, how much money will you need to pay for the health care you’ll need by the time you reach 84? It’s impossible to calculate, because there are so many unknown factors.

Those factors are exactly what Americans need to consider, because most facilities primarily rely on private payments and Medicare does not cover the cost of assisted living facilities. It only pays for rehabilitation in a nursing home for the first hundred days. After that, the only assistance available is Medicaid.

Medicaid coverage is supposed to kick in, only when a person has spent down all of their assets and is basically destitute.

One survey by a major financial company reports that the median monthly cost for an assisted living community is $3,750 or $45,000 a year. Long-term care by a home health aide can top $4,000 monthly or nearly $50,000 a year.

These kinds of numbers demonstrate the need to save and plan well for retirement and for the possibility of needing to pay for assisted living. However, boomers are not at all positioned well for either retirement or assisted living. By the time people start thinking about retirement, they are usually in their 50s or 60s.

No matter when you start, starting is better than not doing anything. When you meet with your estate planning attorney, discuss how your estate is structured, in terms of paying for long-term care. Does it make sense for you to purchase an insurance policy to protect your assets and should it be owned by you or by a trust? What kind of trust?

Your estate planning attorney also is likely to have a network of professionals who help families navigate this complex world of care facilities. Understanding this system and the individual’s needs, can go a long way in making a difficult and expensive process much easier.

Reference: U.S. News & World Report (Oct. 10, 2018) “How Should I Finance Assisted Living?”

Is Bankruptcy in Your Future?

“According to U.S. Bankruptcy Court data, 819,159 people filed for bankruptcy in 2016. Although that is down 6.9 percent from 2015, Debt.org reports that people 55 and older account for 20% of those filings, a number that has doubled among seniors since 1994.”

Overall, personal bankruptcies are on the decline.  However, the number of seniors filing for bankruptcy has reached record numbers. That is a terrible thing to have to face in your later years. According to the article “Planning key to avoid becoming a bankruptcy statistic in retirement” from nwi.com, this unpleasant fate can be avoided. However, it takes early planning.

For starters, people need to do a complete financial analysis. This includes a hard look at current and potential future health care costs, which can decimate even the best retirement plan. That means planning for early retirement, long before Medicare is available. Resources may include a younger spouses’ COBRA, contributing to a Health Savings Account and any coverage gap that may occur between the time the person retires and when they reach age 65 and are eligible for Medicare.

Planning needs to start early, so include the cost of college education for your children and planning for retirement. Saving rates slow down during retirement, so getting started on saving early is critical.

A financial plan can expose shortfalls. People may not want to consider themselves at risk. There is a strong tendency to procrastinate, thinking that there is enough time to catch up. The sooner you start planning, saving and facing reality, the better your chances of not filing for bankruptcy.

Another reason for the increasing rate of bankruptcies is that we are all living longer. That’s a great thing but it also means that health care costs are increasing, especially long-term care.

Medicare does not cover long-term care, including assisted living, memory care and the need for nursing home care. It does not cover routine eye care, dental care or hearing aids.

The national average costs for long-term care in the U.S. in 2016 were $225 a day or $6,844 per month for a semi-private room and $253 a day or $7,698 per month for a private room. All other health care costs have been increasing 6% annually, according to the Center for Medicare and Medicaid.

As a nation, we spent $3.2 trillion for health care in 2016. Those cost increases make planning a challenge for seniors and their families.  Therefore, many unforeseen issues occur.

Another reason for the increase in bankruptcies among seniors is the “unwanted retirement.” Many older workers were downsized during the Great Recession and 60% of retirements were unplanned, according to a survey from TransAmerica. Downsized workers took on debt to survive and are now entering the next phase with expenses they did not count on having.

Many returned to the workforce, but at lower salaries. The Bureau of Labor Statistics says 36% of those 65 and older are still working—and 20% of those who are 70 and older are still working. When a low paying job and Social Security are not enough to cover costs, bankruptcy becomes the only option. 

Another common reason for bankruptcies is the rising healthcare cost especially nursing home costs.  You need to plan ahead so that healthcare costs will not bankrupt your lifetime savings.  Contact an estate planning attorney today.  

Reference: nwi.com (Sep. 16, 2018) ““Planning key to avoid becoming a bankruptcy statistic in retirement”

 

Premature Deaths Rising in the U.S.

Opioid deaths, as well as rapidly rising drug deaths in U.S. may be to blame.

The age at which people will pass away is very important to some people.

Insurance companies need to know for their actuarial tables, so they know what rates they should charge. The government needs to know as well for its estimates regarding future Social Security, Medicare and Medicaid costs.

Because of the importance of knowing when people will most likely pass away, measurements have been developed to give those needing the information a general idea. Life expectancy is a well-known example. However, there are others, including a measure called the premature death rate.

This premature death rate measures the number of years of life lost below the age of 75 per 100,000 people, as Think Advisor reports in "U.S. Premature Death Impact Climbs for Third Straight Year."

A new study has found that the U.S. is going in the wrong direction. For the third straight year, the premature death rate has risen. This means that more years are being lost prematurely per 100,000 people.

While no one can be certain just why Americans are not living as long as they did previously, this new study strongly indicates that the opioid crisis takes considerable blame as well as the rapid rise of drug deaths in the U.S.

If the study is correct about the reason for more premature deaths, then it is likely that the government will need to do more to address opioids in the near future.

Reference: Think Advisor (Dec. 12, 2017) "U.S. Premature Death Impact Climbs for Third Straight Year."