March 12, 2015
Navigating Taxes in Retirement
The tax landscape shifts suddenly when most Americans leave the labor force to retire. The single most important thing to remember is that income taxes can fall dramatically, because retirement incomes are typically lower and because all or a portion of your Social Security benefits will be tax-exempt.
This was among the tax insights supplied by Vorris J. Blankenship, a retirement tax planner near Sacramento, California, who has just finished the 2015 edition of his 5-inch thick “Tax Planning for Retirees.” The following is an edited version of tax information he supplied to Squared Away:
Lower taxes in retirement. Brian and Janet are a hypothetical couple renting an apartment in Nevada, a state with no income tax. In 2013, Brian earned $40,000 at his job, and Janet’s wages were $20,000, for a total income of $60,000. They took the standard deduction on their federal tax return and paid income tax of $5,111.
Brian retired on December 31, 2013. In 2014, he received Social Security payments of $15,000 – $2,750 of which was taxable – and a fully taxable pension from his former employer of $10,000. About one-third of retirees pay some income taxes on their Social Security benefits, because their retirement income exceeds certain thresholds in the tax code.
In 2014, Janet again earned $20,000, but the couple’s total household income declined to $45,000 from $60,000. They took the standard deduction on their federal tax return and paid income tax of only $1,248.
The 75 percent reduction in their taxes is much larger than the 25 percent decline in their income after Brian retired. …Learn More
March 4, 2015
Some Spouses Shun Retirement Planning
Retirement is a joint project for married couples, but remarkably only 43 percent of couples plan for it together.
Are wives to blame?
Some husbands expressed frustration that their wives don’t engage in planning during a focus group conducted by Hearts & Wallets. One man reported that his wife “is not interested in investing,” and another said “all my wife cares about is if we’re going to have the money.”
A San Francisco man volunteered this worst-case scenario: “If I were to get hit by BART on the way home, she would be clueless about what to do with whatsoever there is or how to handle anything.”
Hearts & Wallets cofounder Laura Varas calls it the issue of the “uninvolved spouse.” In a new analysis of its 2013 survey data on 5,400 US households, the financial research firm found that 80 percent of these uninvolved spouses are wives among couples approaching retirement age. The good news is that younger wives are more engaged, Varas said. In early- and mid-career couples, fewer than 60 percent of uninvolved spouses were women.
Yet it’s hard to imagine how anyone can avoid this conversation, given the myriad issues to resolve: Will you stagger your retirement dates, especially if your ages are far apart? If saving and paying off the mortgage are twin retirement goals, are you both still contributing enough to your 401(k)s to ensure you get the full employer match? Have you coordinated your strategies for claiming Social Security? Will you be financially secure if your spouse dies first? …Learn More
February 17, 2015
Breaking Up (the Pension) Is Hard to Do
In a divorce, splitting up the pension is trickier than dividing the house.
Divorcing couples and their advisers “who aren’t hip to divorce splitting of retirement plan assets often do it improperly,” said Howard Phillips, a Delray Beach, Florida, actuary and author of “Dividing Retirement Plan Assets in a Divorce.” He knows, because he values pensions for couples negotiating their divorce settlements and then drafts the order that will be entered into the court.
Dividing a house is easy. Two realtors pouring over sales of comparable nearby properties can readily agree on a value – once the house is sold, the parties pay the realtor and split the proceeds. But a pension plan’s value greatly depends on how and when it’s counted and the method used to allocate that value between the spouses.
Phillips explained the basics of how defined benefit plans and defined contribution plans – 401(k)s, 403(b)s, and IRAs – may be handled in a divorce during a recent podcast for the Retirement Income Industry Association. The following methods for splitting a pension 50/50 have strikingly different outcomes for the participant in the pension plan and for his or her former spouse:
Defined contribution plans:
- Tracing assets: If one spouse comes to the marriage with $50,000 in a 10-year-old 401(k) account, only contributions made during the marriage – and investment returns on the new contributions – are divided. If the plan now has $150,000, the amount that’s divided up can vary widely – or it can be zero if no new contributions were made during the marriage. The remaining balance goes to the spouse who started the 401(k) account. …
February 10, 2015
SSA-1099 Tax Forms Are Now Online
Lose your SSA-1099 tax form showing your total Social Security benefits in 2014? Or perhaps you moved and never received it in the mail.
Last year, more than 156,000 retirees did just that and had to call the U.S. Social Security Administration for a replacement. But help has arrived.
For the first time, retirees can go to the agency’s website to retrieve and print out a duplicate SSA-1099 form.
The SSA-1099, which is mailed in January, provides benefit information necessary for filing an individual’s income taxes. The SSA-1042S, a similar form for immigrants and other non-residents, is also available online. …Learn More
February 5, 2015
Investment Managers Are Human Too
Mutual fund managers would seem to possess myriad advantages over the average individual investor: a business degree, a deep understanding of corporate finance, and years of experience.
But you wouldn’t know it based on how their personal portfolios fare.
A new study of mutual fund managers in Sweden found that that they “do not exhibit superior security-picking ability” when managing their personal portfolios, compared with similarly situated private citizens who also invest for themselves.
Using detailed tax and investment information contained in Swedish government data bases, researchers from the University of Notre Dame and Michigan State University were able to link individual fund managers to their personal equity portfolios and returns, which were then compared with the returns of non-experts with similar socioeconomic characteristics, such as education and age.
Based on the risk-adjusted returns for each group, the researchers found that the fund managers’ personal equity portfolios – individual company stocks and also the stock mutual funds they hold – performed no better than the private investors’ equity portfolios. …Learn More
January 22, 2015
Winging It in Retirement?
Saving should be the centerpiece of any retirement plan today. But a new survey indicates that many Americans on the cusp of retiring have given little thought to the other key issues they’ll face in retirement.
A majority of older Americans recently surveyed by the American College of Financial Services, an educational organization for financial professionals, said they have set a goal for how much money to save to “live comfortably” as retirees. And, when asked to assess their own progress, they feel they’re doing a good job of it. Granted, the survey was limited to a select group of about 1,000 people over age 60, all of whom have at least $100,000 in investable assets.
But the financial risks posed by the transition away from full-time work and a regular paycheck are complex and continual – and preparing for them goes well beyond contributing to a 401(k).
Only a minority of people planning their retirement take into account these important financial issues: …Learn More
January 20, 2015
Errors in Medical Bills Are Rife
Ever try to make sense of a medical bill, with its co-payments, cost-sharing, and government or insurance-company reimbursements that haven’t been paid yet? Hospital stays with multiple doctors and lab tests make billing even messier.
These layers of complexity contribute to errors and confusion that can damage Americans’ credit ratings. Consumers “incur medical debts in collection without certainty about what they owe, to whom, when, or for what,” the federal Consumer Financial Protection Bureau (CFPB) reports.
When a hospital or physician hasn’t been paid, they may, after trying to resolve the issue in-house, pass the unpaid bill to one or a series of collection agencies. Yet nearly one in four of the complaints consumers have made to CFPB about medical bills in collection said the debt “is not mine.” One in five said they’ve paid the bill being reported as past due.
There’s new evidence that the number of people reporting medical debt issues is declining, and new federal rules are aimed at curbing aggressive collection practices for low-income patients. But medical debt still accounts for half of the collections posted on credit reports and is the largest source of complaints about credit reports, exceeding complaints about utility and cable bills and retail and financial transactions. …Learn More