The Trillion-Dollar Stimulus On The Way – What You Need To Know About The CARES Act

Contributed by: Kali Hassinger, CFP®

 

As more states implement quarantine tactics, lawmakers in Washington struck a compromise on a major fiscal stimulus package to help combat the effects of the COVID-19 pandemic. The Coronavirus Aid, Relief, and Economic Security (CARES) Act of 2020 packs in a lot, with upwards of $2 trillion slated to provide critical support for the economy. In comparison, the American Recovery and Reinvestment Act of 2009 was $831 billion.

While we don't know the short or long term effects of this pandemic on the economy, the combination of monetary and fiscal stimulus efforts will hopefully serve as a bridge until regular economic activity can continue. Even with the largest spike in single-week unemployment claims ever, the optimism surrounding this stimulus helped the S&P 500 post its largest three-day rally (+17.6%) since April 1933.

Lawmakers put together this bipartisan package much more quickly than initially anticipated with crucial provisions to expand unemployment eligibility and benefits, small business relief, and even direct financial support to some US citizens. Here's what we know so far:

Checks Are Coming

Based on income and family makeup, some Americans can expect to receive a refundable tax credit as a direct payment from the government now!

Who is eligible? Eligibility is based on Adjusted Gross Income with benefits phasing out at the following levels:

• Married Filing Jointly: $150,000

• Head of Household: $112,500

• All other Filers: $75,000

The rebates are dispersed based on your 2018 or 2019 income (whichever is the most recent return the government has on file) but are actually for 2020.  This means that if your income in 2018 or 2019 phases you out of eligibility, but your 2020 income is lower and puts you below the phase-out (for example, lose your job in 2020, which many are experiencing), you won't receive the rebate payment until filing your 2020 taxes in 2021!  The good news is that those who do receive a rebate payment based on 2018 or 2019 income and, when filing 2020 taxes, find that their income exceeds the AGI thresholds, taxpayers won't be required to repay the benefit.

How much can I expect to receive?

• Married Filing Jointly: $2,400

• All other Filers: $1,200

• An additional credit of up to $500 for each child under the age of 17

If income is above the AGI limits shown above, the credit received will be reduced by $5 for each $100 of additional income.

When will I receive my benefit? The Timeline isn't clear at this point.  The CARES Act mandates that these payments be processed as soon as possible, but that term doesn't provide a firm deadline. 

Where will my money be sent?  The CARES Act authorizes payments to be sent to the same account where recipients have Social Security benefits deposited or where their most recent tax refund was deposited. Others will have their payment sent to the last known address on file.

Retirement Account Changes

• Required Minimum Distributions are waived in 2020

• Distributions due to COVID-19 Financial Hardship – Distributions up to $100,000 from IRAs and employer-sponsored retirement plans that are due to COVID-19 related financial hardships will receive special tax treatment. There will be no 10% penalty for individuals under the age of 59 ½ and the usual mandatory 20% Federal tax withholding will be waived.  Income, and therefore the taxes due from these distributions, can be spread over three tax years (2020, 2021, and 2022), and there is even the option to roll (or repay) distributions back into the retirement account(s) over the next three years.

• Loans from Employer-sponsored Retirement Plans – The maximum Loan amount was increased from $50,000 to $100,000 and allows account holders to borrow from 100% of their vested balance.  Repayment of these loans can be delayed one year.

Charitable Giving Tax Benefits 

• The CARES Act reinstates a possible above-the-line tax deduction for charitable donations up to $300.  This deduction is only available for taxpayers who do not itemize.

• For those who do itemize, the charitable deduction limit on cash gifted to charities is increased from 60% of Adjusted Gross Income to 100% of Adjusted Gross Income for 2020.  If someone gifts greater than 100% of their AGI, they can carry forward the charitable deduction for up to 5 years.  This does not apply to Donor Advised Fund contributions.

Student Loan Repayments

• Student loan payments are deferred, and loans will not accrue interest until the end of September.  Although the interest freeze will occur automatically, borrowers will have to contact their loan servicers and elect to stop payments during this period.

Expanded Unemployment Benefits

• Unlimited funding for Temporary Federal Pandemic Unemployment Compensation to provide workers laid off due to COVID-19 an additional $600 a week, on top of state benefits, for up to four months. This includes relief for self-employed individuals, furloughed employees, and gig workers who have lost contracts during the pandemic.

Small Businesses Support

• In the form of more than $350 billion, the CARES Act offers forgivable loans to help keep the business afloat, a paycheck protection plan, grants, and the ability to defer payment of payroll tax, to name a few.

Individual Healthcare

• HSAs and FSAs will now enable the purchase of over the counter medications as qualified medical expenses.  Medicare Part D participants must be allowed to request a 90 day supply of prescription medication, and if/when a COVID-19 vaccine becomes available, it must be free to those on Medicare.

Additional Healthcare Support

• $150 billion is allocated to hospitals and community health centers to provide treatment and equipment to fight coronavirus.

Education Funding

• $30 billion will be allocated to bolster state education and school funding.

State And Local Government Funding

• $150+ billion will be allocated to "state stabilization funds" to support reduced state and local tax receipts.

Other Provisions

• The CARES Act provides an additional $500 billion buffer for impacted and distressed industries, including the airlines, mass transit, and the postal service.

Depending on the length and impact this pandemic, lawmakers are already talking about another round of intervention in a phased approach.

Life may feel a little chaotic these days, but we hope you take comfort in knowing your financial plan was tailored to your risk tolerance, ability to handle market volatility, and overall financial goals. As always, we are here to answer your questions.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

Taxpayer Relief Amid Coronavirus Crisis

Contributed by: Allison Bondi

Americans now have an extra 3 months to file their 2019 federal income taxes.

President Trump issued an Emergency Declaration on March 13, 2020 to provide relief from tax deadlines to Americans who have been impacted by the COVID-19 emergency.

The new deadline is July 15.

If you’re expecting a refund, consider filing sooner. However, for those with a large tax liability, the new deadline provides some extra time to develop a thoughtful strategy for paying the taxes due.

According to guidance from the IRS, individuals will be able to defer up to $1 million and corporations will be able to defer up to $10 million for 90 days without penalties and interest for taxes due. The $1 million limit applies both to single filers and to married couples filing joint returns.

Does this apply to state income tax payment deadlines?

• No. The extension is for federal income tax, not state income tax. Consult your tax professional for more details about your state’s policies.

What do I need to do to elect the deferral?

• Nothing. Any interest or penalty from the IRS from April 15 to July 15 will automatically be waived. Penalties and interest will begin to accrue on any remaining unpaid balances as of July 16, 2020. 

Does this mean I can make 2019 IRA contributions until July 15?

• Yes. Per IRS publication 590-A: “Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions.” The due date for filing the 2019 return is now July 15, 2020, so you have until that date to make 2019 IRA contributions.

Stay up to date with COVID-19-related changes. Visit irs.gov/coronavirus to explore related resources, and reach out to your tax professional and financial advisor with any questions you have about your specific tax situation and financial plan.

Allison Bondi is a Marketing Administrator at Center for Financial Planning, Inc.® She facilitates marketing initiatives and communications.

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Raymond James and its advisors do not offer tax advice. You should discuss any tax matters with the appropriate professional. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete.

The SECURE Act: How it May Impact Your Retirement

Contributed by: Nick Defenthaler, CFP®

The Senate recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act. It’s a significant change in legislation for most Americans in or preparing for retirement.  

The SECURE Act is the second notable financial planning-related law change in only three years! The first was in 2017 when the Tax Cuts and Jobs Act (TCJA) significantly changed our tax code. Fast forward to 2019, the SECURE Act became law on December 20th, adjusting rules related to retirement accounts. To see just one meaningful adjustment to our tax code or retirement plan rules every 10-15 years is typical; so to see a major tax code overhaul and the implementation of the SECURE Act, all in a matter of only three years, is unprecedented. 

Needless to say, these changes have certainly kept your Center team on its toes! The SECURE Act contains almost three dozen sections, but for most of you, there are only a few adjustments that could impact your financial plan. Let’s dive in!   

Inherited Retirement Accounts & the End of ‘Stretch’ Distributions   

The new legislation changes how non-spouse account beneficiaries must distribute assets from inherited retirement accounts (IRAs) by removing the so-called ‘stretch’ provision. Most IRA beneficiaries will now have to distribute their entire inherited retirement account within 10 years of the year of death of the owner.

Tell me more…

When a non-spouse beneficiary inherited a retirement account such as an IRA, an annual Required Minimum Distribution (RMD) was required. Typically we think of RMDs occurring in our 70s and beyond but they are also present in many cases for beneficiaries of retirement accounts. If the RMD is not met by year-end, there is a stiff, 50% penalty on any funds that were not distributed that were supposed to be. When a spouse inherits a retirement account, however, there were (and still are) favorable rules in place, that in many cases, do not force the widowed spouse to take annual RMDs. 

Beneficiaries of retirement accounts were allowed to 'stretch' distributions over their lifetime which meant that the IRS only required a small portion of the account to be distributed from the retirement account each and every year.  For those who did not necessarily “need” the inherited dollars to live off of, this was a highly beneficial attribute of an inherited retirement account. Remember, when distributions are made from Traditional, pre-tax retirement accounts, the funds are considered taxable income to the owner and can impact one’s tax bracket for the year. However, if the beneficiary was only taking out the minimum distribution required by the IRS, the beneficiary typically did not have to worry about being pushed into a much higher marginal tax bracket. 

For example:

A 100 year old could name her 2 year old great-great grandchild as the beneficiary on her IRA. When the 100 year old client died, the great-great grandchild could stretch RMDs over their lifetime – which would result in a very small taxable event for the child each year given their age. To put it mildly, the IRS was not a fan of this because it essentially allowed families to turn retirement accounts into a very powerful, multigenerational wealth preservation tool that generated very little tax revenue over an extended period of time. 

How do the new rules work?

Moving forward, the ‘stretch’ provision has been eliminated for non-spouse account beneficiaries. For those beneficiaries who inherit a retirement account from an account holder who passes away in 2020 and beyond, the new standard under the SECURE Act will be the ’10-Year Rule’.   

Under this 10-Year Rule, the entire IRA must be emptied by the end of the 10th year following the death of the original account owner. Unlike like previous law under the ‘stretch’ provision, there is no annual RMD, the beneficiary has full control over how much they distribute from the account. As you might suspect, this will now require a high level of strategic tax planning as a retirement account beneficiary.

Questions to ask:

Does it make sense to take distributions evenly over that 10-year time frame if income is projected to be the same for the foreseeable future? Is the beneficiary’s income dramatically lower in a particular year? If so, could it make sense to take a sizeable distribution from the IRA so the taxable income from the account is taxed at a lower rate than most other years? In my humble opinion, this makes working with a comprehensive financial planner even more critical for IRA beneficiaries given all of the moving parts clients will now have to navigate from a tax standpoint. 

Roth IRA/401k/403b Accounts

We haven’t talked much about it yet but Roth IRA/401k/403b accounts are also subject to the 10-year rule, however, distributions to beneficiaries are NOT taxable. For those inheriting Roth accounts, waiting until the last minute and liquidating the account in year 10 could actually be a very smart move to take full advantage of the tax-free growth aspect of a Roth account. 

What if I already have an inherited IRA that I’m taking lifetime, stretch distributions from?  

If you inherited a retirement account from someone who passed away in 2019 or before, you are grandfathered into using the ‘stretch’ provision. The new, 10-year rule will NOT apply to you. 

Who is exempt from the new 10 year distribution rule?

• Spousal beneficiaries

• Individuals who are not more than 10 years younger than the decedent

• Disabled or chronically ill beneficiaries

• Certain minor children (of the original account owners) but only until the child attains age 18 or 21, depending on the state of residence

• 501(c)(3) charitable organizations

Possible planning strategies to consider given the new 10-year distribution rule:

• Roth conversions during the original account owners life to reduce taxable IRA assets.

• Using pre-tax retirement accounts for spending needs to reduce taxable IRA assets in the original account owner’s estate.

• If charitably inclined, the original account owner should consider utilizing the Qualified Charitable Distribution (QCD) from their IRA or name their favorite charity as the beneficiary on the pre-tax retirement account (remember, charities do NOT pay any tax when they inherit these funds).

• If you have multiple beneficiaries, be strategic with who you name as the beneficiary of the various accounts you own (ex. Consider leaving pre-tax assets to a son who is in a low tax bracket but leave your Roth IRA to your daughter who is in a high bracket).   

Required Minimum Distributions Age Increase

Another major headline from the SECURE Act is moving the age one must begin taking Required Minimum Distributions (RMDs) from age 70 ½ to age 72.

This gives account owners an extra 18 months of tax-deferred growth if they don’t immediately need to tap into their retirement accounts.

Keep in mind, this new rule only applies to those who turn 70 ½ in 2020 or later. If you have already attained age 70 ½ and started taking RMDs, you are still required to do so under previous rules.

Although the age for RMDs is being pushed out a bit, the age at which IRA account owners can utilize the Qualified Charitable Distribution (QCD) strategy remains unchanged at age 70 ½. Given recent tax reform and its impact on charitable planning, we were happy to hear this news.   

Eliminates the age limit for making Traditional IRA contributions

The SECURE Act also lifts the age restriction on who can contribute to a Traditional IRA. Previously, once an individual reached age 70 ½, they were no longer able to contribute directly. This rule always puzzled me, because with Roth IRAs, anyone, regardless of age, could contribute to the account as along as he or she had earned income from working and was eligible to do so based on certain income limits. 

While we don’t foresee this affecting a large number of Center clients, it’s on our radar, especially as this rule relates to "back-door" Roth IRA conversions.   

In summary… 

As with any law change affecting personal financial planning, there are still areas we are staying on top of with continued IRS guidance (ex. A 10-year rule on retirement accounts that name a trust as a beneficiary).  We are committed to keeping you informed and up to speed on these changes.   

Our financial planning team looks forward to having individual conversations with you soon to explain how the SECURE Act will impact your own personal financial situation.  At our 2020 Economic & Investment Update Event in February, we will spend roughly 15 minutes on the SECURE Act and provide even further commentary beyond the detailed summary above. Be sure to sign up if you haven’t already. 

As always, please feel free to reach out to your advisor if you have specific questions. On behalf of the entire Center team, we wish you a very Happy New Year and look forward to helping guide you and your family through the ever changing financial landscape!   

Nick Defenthaler, CFP®, RICP®

Partner and CERTIFIED FINANCIAL PLANNER™ 

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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The information contained in this report does not purport to be a complete description of the securities, markets, or developments referred to in this material. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional. Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to its own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

New Year Financial To-Dos!

Contributed by: Kali Hassinger, CFP®

There's no better time than a fresh decade to begin making plans and adjustments for your future. Although we may think of the New Year as a time for "resolutions," it's important to focus on actionable and attainable goals, too. Instead of setting a lofty resolution without a game plan in mind, might I suggest that you consider our New Year Financial checklist below? If you get through this list, not only will you avoid the disappointment of another forgotten resolution in February, you'll feel the satisfaction of actually accomplishing something really important!

• Review your net worth as compared to one year ago, or calculate your net worth for the first time! Regardless of how markets perform, it's important to evaluate your net worth annually.  Did your savings increase or should you set a new goal for this year? If you find that you’re down from last year, was spending a factor?  There’s no better way to evaluate than by taking a look at the numbers!

• Speaking of spending and numbers, review your cash flow!  How much came in last year and how much went out?  Ideally, we want more coming in than is going out!

• Now, let's focus on the dreaded budget, but instead we’ll call it a spending plan.  Do you have any significant expenses coming up this year?  Be prepared by saving enough for unexpected costs. 

• Be sure to review and update beneficiaries on IRAs, 401(k)s, 403(b)s, life insurance, etc.  You'd be surprised at how many people don't have beneficiaries listed on retirement accounts. Some even forgot to remove their ex-spouse!

• Revisit your portfolio's asset allocation. Make sure your portfolio investments and risks are still aligned with your life, goals, and comfort level. I'm not at all suggesting that you make changes based on market headlines, but you want to be sure that the retirement or investment account you opened 20 years ago is still working for you.

• Review your Social Security Statement. If you're not yet retired, you will need to go online to review your estimated benefit. Social Security is one of the most critical pieces of your retirement, so be sure your income record is accurate.

Of course, this list isn't exhaustive. Reviewing your financial wellbeing is an in-depth process, which is why the final step is to set up a review with your advisor. Even if you don't work with a financial planner, at a minimum set aside time on your own, with your spouse, or a trusted friend to plan on improving your financial health (even if you only get to the gym the first few weeks of January).

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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Any opinions are those of the author and not necessarily those of Raymond James. This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

The new SECURE Act brings changes to your retirement accounts

Contributed by: Kali Hassinger, CFP®

The Senate recently passed the Setting Every Community Up for Retirement Enhancement (SECURE) Act, a change in legislation significant to most Americans who are preparing for or in retirement. Some provisions, however, also have implications for those set to inherit retirement accounts.

While the new SECURE Act expands the amount of time employees and retirees can continue saving (and deferring taxes) within their retirement plan accounts, the bill changes the required distribution rules for non-spouse beneficiaries of retirement plans such as 401(k)s, 403(b)s, Traditional IRAs, and Roth IRAs.

The Maximum age for traditional IRA contributions

The SECURE Act removes the age cap, currently age 70 ½, for Traditional IRA contributions. This change would allow older workers to save a portion of their earned income into a Traditional IRA, just as they currently do within a Roth IRA. (The Roth has never carried an age cap for contributions.) For those age 50 and older in 2019, the maximum contribution is $7,000. Keep in mind, this means that an older worker who has enough income to cover the total IRA contribution could also contribute to an IRA for a retired spouse.

401(k)s & Annuities

The SECURE Act would allow more 401k plans to offer annuities that provide guaranteed, lifetime income for clients in retirement. In the past, employers have been concerned to offer such annuities, due to the fear of being sued for breach of fiduciary duties if the annuity provider faces future financial problems. To address this issue, the SECURE Act would create a safe harbor that employers can use when choosing a group annuity. The Act would also increase the portability of annuity investments by letting employees who take another job or retire to move their annuity to another 401k plan or to an IRA without incurring surrender charges and fees.

Required Minimum Distribution changes

This new bill also brings a significant change to Required Minimum Distributions, which refers to the age at which distributions from retirement accounts must begin. The age has been raised from 70 ½ to 72 years old. This allows an extra 18 months of tax-deferred growth for account holders who don’t have an immediate need to tap into their retirement accounts. These changes come into effect on December 31, 2019, so anyone who is 70 ½ before that time will be grandfathered in under the old laws. The rules surrounding Qualified Charitable Distributions, however, will remain the same. Those ages 70 ½ and older can still give tax-free donations to charities, if the funds are directly moved from the IRA to the charity.

Non-Spouse Beneficiaries of IRAs

The new legislation significantly changes how non-spouse account beneficiaries must distribute assets from inherited retirement accounts. The new law mandates that beneficiaries withdraw the balance of the inherited account within 10 years from the year of death. This removes the beneficiary’s option to spread out (or stretch) the distributions based on life expectancy. As a result, many beneficiaries will have to take much larger distributions, on average, in order to distribute their accounts within a shorter time.

The Secure Act also includes some additional changes:

• A provision that allows up to a $5,000 penalty free retirement plan withdrawal within a year of birth or adoption of a child ($5,000/parent, so $10,000 total for a married couple).

• Increased access to multiple employer retirement plans for unrelated small employers.

• Access to 401(k)s and retirement plans for part-time employees who have worked 500 hours per year for 3 consecutive years (and who are 21 years old at the end of the 3 year period).

• Auto enrollment 401(k) contribution limits will be increased to 15%. Previously, auto enrollment retirement plans were required to cap contributions at 10%.

• Also, stipends received by Graduate & Post-doctoral students will now be considered earned income for making IRA contributions.

While it may be too soon to understand all of the implications of these changes, we’re happy to be a resource for you. If you have any questions about what this means for your financial plan, don’t hesitate to contact us!

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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This information has been obtained from sources considered to be reliable, but Raymond James Financial Services, Inc. does not guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Distributions may be subject to certain taxes. Guarantees are based on the claims paying ability of the issuing company. Changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Retirement Plan Contribution Limits and Other Adjustments for 2020

Contributed by: Nick Defenthaler, CFP®

Last month, the IRS released updated retirement account contribution and income limit figures for 2020. Like the recent Social Security cost of living adjustment, these adjustments are minor, but certainly worth noting.

Employer Retirement Plans (401k, 403b, 457, and Thrift Savings Plans)

• $19,500 annual contribution limit (up from $19,000 in 2019)

• $6,500 “catch-up” contribution for those over the age of 50 (up from $6,000 in 2019, and the first increase since 2015 for this contribution type)

• Total amount that can be contributed to a defined contribution plan, including all contribution types (employee deferrals, employer matching and profit sharing), increases to $57,000 (up from $56,000 in 2019) or $63,500 for those over the age of 50 ($6,500 catch-up)

o   Consider contributing after-tax funds, if available and cash flow allows for it.

It’s also worth noting that contribution limits to Traditional IRAs and Roth IRAs were left unchanged moving into 2020 ($6,000 under age 50, $7,000 over age 50).

In addition to the increased contribution limits for employer-sponsored retirement plans, the IRS adjustments provide other increases that can help savers in 2020. A couple of highlights include:

Traditional IRA deductibility income limits:

Contributions to a Traditional IRA may or may not be tax deductible, depending on your tax filing status, whether you are covered by a retirement plan through your employer, and your modified adjusted gross income (MAGI). The deductible amount of your Traditional IRA contribution is reduced (“phased out”) as your MAGI approaches the upper limits of the phase-out range. For example:

• Single

  • Covered under an employer-sponsored retirement plan
    2020 phase out: $65,000 - $75,000

• Married filing jointly

  • Spouse contributing to the IRA is covered under an employer-sponsored retirement plan
    2020 phase out: $104,000 - $124,000

  • Spouse contributing is not covered by an employer-sponsored plan, but the other spouse is covered under an employer-sponsored retirement plan
    2020 phase out: $196,000 - $206,000

Roth IRA contribution income limits:

Whether or not you can make the maximum contribution to a Roth IRA depends on your tax filing status and your MAGI. The contribution you are allowed to make is reduced ("phased out") as your MAGI approaches the upper limits of the phase-out range.

• Single

  • 2020 phase out: $124,000 - $139,000

• Married filing jointly

  • 2020 phase out: $196,000 - $206,000

If your income is over this limit, and you cannot make a regular annual contribution, you might consider a popular planning tool known as the “back-door” Roth conversion.

As we enter 2020, these updated figures will be on the forefront when updating your financial game plan. However, as always, if you have any questions surrounding these changes, feel free to reach out to our team!

Nick Defenthaler, CFP®, RICP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® He contributed to a PBS documentary on the importance of saving for retirement and has been a trusted source for national media outlets, including CNBC, MSN Money, Financial Planning Magazine, and OnWallStreet.com.

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This material is being provided for information purposes only and is not a complete description, nor is it a recommendation. Please note, changes in tax laws may occur at any time and could have a substantial impact upon each person's situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.

Contributions to a traditional IRA may be tax-deductible depending on the taxpayer's income, tax-filing status, and other factors. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax and, if taken prior to age 59 1/2, may be subject to a 10% federal tax penalty.

Unless certain criteria are met, Roth IRA owners must be 59½ or older and have held the IRA for five years before tax-free withdrawals are permitted. Additionally, each converted amount may be subject to itsx own five-year holding period. Converting a traditional IRA into a Roth IRA has tax implications. Investors should consult a tax advisor before deciding to do a conversion.

Capital Gains Distributions from Mutual Funds

Contributed by: Kali Hassinger, CFP®

Each November and December, investment companies must pay out their capital gains distributions for the year. If you hold these funds within a taxable brokerage account, distributions are taxable events, resulting from the sale of securities throughout the year.

Investors often meet these pay-outs with minimal enthusiasm, however, because there is no immediate economic gain from the distributions. That may seem counterintuitive, given that we refer to these distributions as capital gains! 

When capital gains distributions from mutual funds are paid to investors, that fund’s net asset value is reduced by the amount of the distribution.

This reduction occurs because the fund share price, or net asset value, is calculated by determining the total value of all stocks, bonds, and cash held in the fund’s portfolio, and then dividing the total by the number of outstanding shares. The total value of the portfolio is reduced after a distribution, so the price of the fund drops by the amount of the distribution.

In most situations we recommend that our clients reinvest mutual fund capital gain distributions,  given this is right for the investor's individual financial circumstances. 

This strategy allows you to purchase additional shares of the mutual fund while the price is reduced. Although your account value will not change, because the distribution reduces the fund’s net asset value, you have more shares in the future. By incurring the capital gain, you are also increasing your cost basis in the investment. 

As a counter point, If you rely on the dividend for income it might make more sense to take the mutual fund dividend as cash and not reinvest.

If you own mutual funds in a taxable account and expect the distributions to be large, you should work with your financial planner and tax advisor to weigh the advantages and disadvantages of owning the investment and ultimately incurring the capital gain.

Kali Hassinger, CFP®, CDFA®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She has more than a decade of financial planning and insurance industry experience.

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The information contained in this blog does not purport to be a complete description of the securities, markets, or developments referred to in this material. Investments mentioned may not be suitable for all investors. There is no guarantee that these statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Raymond James and its advisors do not provide tax advice. You should discuss any tax matters with the appropriate professional. Opinions expressed in the attached article are those of the author and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Every type of investment, including mutual funds, involves risk. Risk refers to the possibility that you will lose money (both principal and any earnings) or fail to make money on an investment. Changing market conditions can create fluctuations in the value of a mutual fund investment. In addition, there are fees and expenses associated with investing in mutual funds that do not usually occur when purchasing individual securities directly.

Planning for Retirement when Unexpected Events Occur

Contributed by: Sandra Adams, CFP®

This year, more than ever, I have found myself meeting with clients in the prime of their retirement planning years who have experienced some unexpected life events – events that might not normally be part of the retirement planning process.

What am I speaking of? I have had young pre-retirees experience terminal illnesses or become caregivers for spouses or family members, experience the loss of a spouse, experience divorce after a very long marriage but before retirement, and most recently, I have had some lose their long-time jobs with recent layoffs at companies like General Motors.

Losing a job is just one of many unexpected, pre-retirement events that can potentially throw savings goals and plans off course. Some may add that a very negative or extended stock market decline can also hinder retirement and, in most cases, is unexpected. As the old saying goes, you should always “expect the unexpected”.

What can you or should you do now to make sure that you can keep your retirement strategy on track, even if one of these unexpected events comes creeping into your life?

1. Plan Early and Update Often. Although many folks don’t like to think about it, start digging into how much you much income you will need in retirement. If your income projection is significantly less than you are bringing home now, what will change in retirement to make you need less income? Will you have significantly less debt? Will the activities you plan to do in retirement cost significantly less? Be realistic. Take stock on a regular basis of where you are towards your savings goals versus your needs, so that you stay on track and are able to update your strategy if you are not moving toward those goals.

2. Save, Save, and Then Save a Little More. When times are good, and while you can, stretch yourself to meet your savings goals. There is a delicate balance between spending to enjoy your life now and setting aside funds for your retirement. It makes sense to set significant retirement savings goals (especially if you didn’t start as early as you wanted to). And making it a habit to save more – even one percent each year – will help you reach or exceed your retirement savings goals. Other ways to get ahead can include allocating a portion of your annual raise or any bonus you might receive to retirement savings. Aim to save, save, and save a little more to put yourself in a position to absorb the unexpected.

3. Take Control of What You Can Control. While you cannot control what happens to the markets, your job (for the most part), or your health (other than eating right and exercising), there are things you can control. You can control your savings rate: You can be disciplined about saving, save regularly and continue to save more over time. You can save in the right places: You can attempt to max out your savings within your employer retirement savings plans on a tax-deferred basis, you can have a liquid cash emergency reserve fund of at least 3-6 months of expenses “in case” something unexpected comes up, and you can have an after-tax investment account and/or ROTH IRA (if your income tax bracket allows) in case a life event causes an earlier-than-expected retirement or a temporary unemployment situation. You can keep debt under control and plan to have as much debt paid off as possible going into retirement. Reducing fixed costs during retirement allows you to use your cash flow for wants versus needs, and provides you with greater flexibility if an unexpected event occurs.

4. Put Protections and Guardrails in Place. Planners like to call this “risk management”. We are talking about protection for contingencies, so they don’t sink your retirement ship. Having a reserve or emergency savings account is a good first step. But what else might you put in place? It’s important to have the right insurances – disability insurance, life insurance, and long-term care insurance. Continuing education and networking are also important protections – WHAT? Keep up your credentials and training, so that if your current job is phased out, you are prepared to quickly jump back on the horse and become re-employed. Many folks become complacent, and if something unexpected happens with their company or their role, are completely unprepared to seek new employment. Unfortunately, the U.S. Government Accountability Office estimates that older workers wait more than 40 weeks to become re-employed, so being prepared can make all of the difference.

5. Seek Good Advice. This is not a time to DIY. Way too many things can go wrong when it comes to a potential early retirement transition. Seeking the advice of a trained professional can help you find the best course of action. In most cases, assessing your specific situation and making the best possible decisions, especially when it comes to things like pensions, Social Security, and which accounts to tap for retirement income, can make a huge difference.

“The more things change, the more things stay the same” – Jean-Baptiste Alphonse Karr

When we do an initial financial plan for a client, we like to say that something will very likely change when the client walks out the door, and we will need to adjust the plan. Life happens. A financial plan must be fluid and flexible. And so must you, as someone who is planning for retirement. Unexpected events that happen just as you are reaching for the golden doorknob to retirement can be frustrating. But if you have expected the unexpected, planned for the contingencies, and have some spending flexibility built into your plan, you will be on your way to a long and successful retirement.

Sandra Adams, CFP®, CeFT™, is a Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® She specializes in Elder Care Financial Planning and serves as a trusted source for national publications, including The Wall Street Journal, Research Magazine, and Journal of Financial Planning.

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Opinions expressed in the attached article are those of Sandra D. Adams and are not necessarily those of Raymond James. All opinions are as of this date and are subject to change without notice. Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. 401(k) plans are long-term retirement savings vehicles. Withdrawal of pre-tax contributions and/or earnings will be subject to ordinary income tax, and if taken prior to age 59 ½, may be subject to a 10% federal tax penalty. Roth 401(k) plans are long-term retirement savings vehicles. Like Traditional IRAs, contributions limits apply to Roth IRAs. In addition, with a Roth IRA, your allowable contribution may be reduced or eliminated if your annual income exceeds certain limits. Contributions to a Roth IRA are never tax deductible, but if certain conditions are met, distributions will be completely income tax free. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

Certified Financial Planner Board of Standards Inc. (CFP Board) owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design), and CFP® (with flame design) in the U.S., which it authorizes use of by individuals who successfully complete CFP Board's initial and ongoing certification requirements.

Reducing Your Medicare Premium Surcharges

Contributed by: Robert Ingram, CFP®

For many clients with incomes above a certain level, Medicare premiums may be higher for Part B and Part D. As a Medicare recipient’s income exceeds specific thresholds, they may pay adjusted amounts in addition to the baseline Part B and/or Part D premiums.

Now, what if you have been paying these Medicare surcharges, but you experience a drop in your income? Can you also get your Medicare surcharge reduced? The answer is, possibly yes.

If you experience a change to your income because of certain life events, you can request that the Social Security Administration (SSA) review your situation and use your more recent income to determine what premium adjustment (if any) should apply. Examples of these life-changing events include:

• Work stoppage or work reduction

• Death of a spouse

• Marriage

• Loss of pension income

• Divorce or Annulment

• Loss of income-producing property

You might be asking yourself, “Why do I have to request this? Aren’t Medicare premiums automatically adjusted according to my income?”. A big reason for making the change request when you experience a qualifying change in income has to do with how and when the SSA measures your income.

Income-Related Monthly Adjustment Amount (IRMAA)

To determine whether your income makes you subject to an Income-Related Monthly Adjustment Amount (IRMAA) to the regular Medicare Part B or Part D premiums for the current year, the SSA looks at the income you reported to the IRS for the previous two years. This means that your Modified Adjusted Gross Income (Adjusted Gross Income with tax-exempt income added back) reported for 2017 determines your Medicare premiums for 2019. 

For individuals paying Part B premiums, for example, the standard premium in 2019 is $135.50 per month. However, the following table illustrates what you would pay in 2019 for Part B depending on your 2017 income.

For a couple who filed a joint return with income above $170,000 and up to $214,000 in 2017, each spouse paying for Medicare Part B may pay an additional $54.10 per month above the standard premium (a total of $189.60 monthly) in 2019. A couple with income that falls between $320,000 and $750,000 (or an individual filing single with income between $160,000 and $500,000) in 2017 could each pay an additional $297.90 above the standard premium, for a total of $433.40 per month in 2019.

If an individual (or couple) experienced a drop in income for 2019, it might normally take until 2021 for the Medicare premiums to reflect any reduction based on the 2019 income. Let’s say the couple who had reported income between $320,000 and $750,000 retires in 2019 and sees their income drop to an expected $165,000. The expected income falling within the $170,000 threshold could mean a difference of $297.90 per month (each!) in Medicare Part B premiums (from $433.40 to $135.50).

If a qualifying life event caused the drop in expected income, then filing a request with the SSA could mean a more immediate change in Medicare premiums, rather than waiting for the savings until 2021.

How do you request the premium surcharge reduction? 

If you think you have experienced a reduction in income due to one or more of the qualifying events, make your request to the Social Security Administration by submitting the Medicare Income-Related Monthly Adjustment Amount –Life-Changing Event form (form SSA-44).

Along with this form, you will also provide supporting documentation for your Modified Adjusted Gross Income and your life-changing event (see form SSA-44 instructions). Examples of supporting documentation may include items such as:

• Federal income tax return

• Signed statements from employers, pay stubs

• Certified documents for transfers of a business

• Marriage certificate

• Certified death certificates

• Letter or statement from pension administrator explaining a reduction/termination

For other disagreements with an IRMAA determination, you have the right to appeal. You can file an appeal online (socialsecurity.gov/disability/appeal) and select “Request Non-Medical Reconsideration”, file a Request for Reconsideration form, or contact your local Social Security office.

If you disagree with an IRMAA determination because your reported Modified Adjusted Gross Income is incorrect, you need to address the correction first with the IRS.

Because these Medicare surcharges are determined each year, you have opportunities to do more proactive income and tax planning leading up to and after Medicare enrollment. Employing different strategies that help control your Adjusted Gross Income could also help control potential Medicare premiums in future years. If you have questions about your particular situation, feel free to reach out to us!

• Want more information about Medicare? Check out The Center’s Medicare FAQ

• Looking for financial strategies and tax tips for year-end? Check out this webinar.

Robert Ingram, CFP®, is a CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® With more than 15 years of industry experience, he is a trusted source for local media outlets and frequent contributor to The Center’s “Money Centered” blog.

What You Need to Know Before You Dip Into Retirement Accounts

Contributed by: Timothy Wyman, CFP®, JD

In general, a 10% penalty applies when you access your IRA, 401(k), and other retirement accounts before age 59. The word “penalty” seems harsh, so the Internal Revenue Code classifies it as an excise tax on early distributions. Moreover, the 10% excise tax is in addition to the ordinary income taxes owed on distributions from pretax accounts. Therefore, the general rule of keeping your hands off these funds until at least age 59.5 is a good one. 

However, what if you really need the money?

Fortunately, there are exceptions to the 10% penalty rule. A complete list may be found here.

For example, “first-time” homebuyers may take out up to $10,000 to help buy or build their primary residence. A similar exception applies to higher education costs for you, your spouse, or children. These two apply for IRAs, but not 401(k) accounts.

Another exemption for medical expenses paid on behalf of yourself, your spouse, or a dependent applies only on the amount that exceeds 10% of your adjusted gross income. Let’s assume Bob and Mary are facing significant ($170,000) medical expenses for their son, Bob Jr. The expenses are not covered by their regular health insurance plan, so the couple withdraws $170,000 from Bob’s IRA. In addition to pension and social security, this distribution increases their Adjusted Gross Income to $250,000, so Bob and Mary will pay about $2,500, the 10% excise tax on approximately $25,000. 

It is best to avoid early distributions from your IRA and 401(k) accounts; after all, the money is meant for your retirement years.

However, in the event there are no other alternatives, you may be able to avoid the 10% penalty….er, excise tax.

Timothy Wyman, CFP®, JD, is the Managing Partner and CERTIFIED FINANCIAL PLANNER™ professional at Center for Financial Planning, Inc.® For the second consecutive year, in 2019 Forbes included Tim in its Best-In-State Wealth Advisors List in Michigan¹. He was also named a 2018 Financial Times 400 Top Financial Advisor²

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¹ The Forbes ranking of Best-In-State Wealth Advisors, developed by SHOOK Research is based on an algorithm of qualitative criteria and quantitative data. Those advisors that are considered have a minimum of 7 years of experience, and the algorithm weighs factors like revenue trends, AUM, compliance records, industry experience and those that encompass best practices in their practices and approach to working with clients. Portfolio performance is not a criteria due to varying client objectives and lack of audited data. Out of 29,334 advisors nominated by their firms, 3,477 received the award. This ranking is not indicative of advisor's future performance, is not an endorsement, and may not be representative of individual clients' experience. Neither Raymond James nor any of its Financial Advisors or RIA firms pay a fee in exchange for this award/rating. Raymond James is not affiliated with Forbes or Shook Research, LLC. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website's users and/or members. Any opinions are those of Center for Financial Planning, Inc.® and not necessarily those of Raymond James.

² The FT 400 was developed in collaboration with Ignites Research, a subsidiary of the FT that provides special-ized content on asset management. To qualify for the list, advisers had to have 10 years of experience and at least $300 million in assets under management (AUM) and no more than 60% of the AUM with institutional clients. The FT reaches out to some of the largest brokerages in the U.S. and asks them to provide a list of advisors who meet the minimum criteria outlined above. These advisors are then invited to apply for the ranking. Only advisors who submit an online application can be considered for the ranking. In 2018, roughly 880 applications were re-ceived and 400 were selected to the final list (45.5%). The 400 qualified advisers were then scored on six attrib-utes: AUM, AUM growth rate, compliance record, years of experience, industry certifications, and online accessibil-ity. AUM is the top factor, accounting for roughly 60-70 percent of the applicant's score. Additionally, to provide a diversity of advisors, the FT placed a cap on the number of advisors from any one state that's roughly correlated to the distribution of millionaires across the U.S. The ranking may not be representative of any one client's experi-ence, is not an endorsement, and is not indicative of advisor's future performance. Neither Raymond James nor any of its Financial Advisors pay a fee in exchange for this award/rating. The FT is not affiliated with Raymond James.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation. Any opinions are those of the author and not necessarily those of Raymond James