1. Selling a Business or Real Estate: In 2013, long term capital gains taxes on all investments, including privately owned businesses or real estate, could increase by 33%, from an effective tax rate of 15% to an effective tax rate of 20%.  If your business or real estate is worth $250K or more, an additional 3.8% “Medicare” tax will be added to your 2013 tax bill.  Thus, waiting until 2013 to sell a highly appreciated property or business could increase your federal taxes on the sale by 58%.
2. Paying for College with a 529 Plan: While funding a Colorado College Invest 529 Plan is not deductible on federal income taxes, for Colorado residents this funding receives a Colorado state tax deduction of the yearly amount funded.   The deduction also applies to funds for children that are already in college.  If your child’s fall college payments are due this summer, put the full amount required into the College Invest 529 Plan’s Money Market account.  When the college payments are due, send these funds to your child’s college.  Using this funding technique could reduce your Colorado income tax bill by $1,860, if your child’s qualified college expenses are $40,000 a year.
3. Set-up a SIMPLE IRA: If you run a small business with one or more employees, consider a SIMPLE IRA.  This retirement plan allows a business owner to make tax deferred contributions of $11,500 or $14,000 if the owner is over age 50. The business will also contribute either 2% or 3% of employee’s salaries (including the owner’s salary) to each employee’s SIMPLE IRA.  SIMPLE IRA Plans must be established before October 1^st to qualify for that year.
4. Roth IRA Conversion: Convert a traditional IRA to a Roth IRA as early in the year as possible.  If the market goes up, the converted funds receive tax free growth. If the market declines significantly, you may convert (recharacterize) these funds back into the traditional IRA.  If the funds are “recharacterized” before December, they can be converted back to the Roth IRA, after waiting for thirty days.  Even if the market declines next year, you can still “recharacterize” Roth converted funds until October 1^st 2013.
5. Medical Expense Deductions: If you will need medical services that are not covered by medical insurance, get them done in 2012.  If your Adjusted Gross Income (AGI) is $50K, only medical expenses above $3,750 will be deductible in 2012.  Thus, if your medical expenses are $5,000 in 2012, you will have a $1,250 itemized deduction.  However, in 2013, the non-deductible medical amount will increase from 7.5% to 10% of AGI.  Thus, the same $5,000 medical expense will not be tax deductible.
6. Save those Sales Receipts: The ability to deduct sales taxes instead of state income taxes has not been renewed for 2012.  With the large number of Democrat and Republican states with low or no income tax, it is likely that this deduction will be reinstituted before the end of 2012.  If so, saving sales receipts, especially for large ticket items like car purchases, may reduce federal taxes owed, especially for those who owe little in state income taxes.
7. Allocations Between Taxable and Tax Deferred/Free Accounts: In 2012, high dividend paying stocks and mutual funds are very tax efficient.  In 2013, not only will long term gains likely increase by 33%, but the taxes on dividends could almost triple for high earners.  Now is the time to begin planning a portfolio for tax optimization in 2013.  Holding growth stock/funds, with little or no dividends, in taxable accounts and high dividend stocks/funds in tax deferred accounts could be very tax effective in 2013.

These suggested tax saving steps may significantly lower federal and state taxes in 2012 and beyond.  Procrastination in 2012 could cost you considerably in current and future taxes. Visit with a qualified financial advisor or tax advisor to help determine 2012 tax strategies that will work for you.

The two political parties are ideologically far apart when it comes to both government spending and methods of increasing government revenue.  With elections in November, it is highly unlikely that either party will win the presidency and both houses, including the sixty seat majority required for control of the Senate.  Thus, we can expect continued gridlock on taxation.  The one tax change that will not require any action by Congress is the expiration of the “Bush era tax cuts” passed in 2001 and 2003.

In 2013, if the tax cuts that were passed in 2001 and 2003 are allowed to expire, everyone’s tax rates will increase.  The Congressional Budget Office (CBO) estimates, using their static tax estimation technique, that the expiration of the 2001 and 2003 tax cuts will increase federal revenues by one hundred and two hundred billion dollars in 2013.  This is a government revenue stream that neither party can ignore.

Let’s look at some of the implications of the expiration of these tax reductions.   In 2012, we have income tax rates of 10%, 15%, 25%, 28%, 33% and 35%.  With no legislative changes, in 2013 these rates will rise to 15%, 25%, 28%, 36% and 39.6%.

In 2013, long term capital gains rates will increase from 15% to 20% and qualified dividend tax rates will increase from 15% to ordinary income tax rates that can be as high as 39.6%.  In 2013, qualified dividends, taxed at a maximum federal tax rate of 15%, could be taxed at the tax payer’s ordinary income tax rate.  Thus, dividends would receive tax increases that could be as great as 164% of their current tax rate.

Higher income taxpayers will become subject to a new Medicare tax in 2013. This new tax, included in the 2010 healthcare legislation, will add a 3.8% tax to investment income for singles earning in excess of $200,000 and joint filers whose earnings are in excess of $250,000.  The same health care legislation imposes an additional 0.9% Medicare tax on singles earning over $200,000 and joint filers earning over $250,000.

Inaction by Congress means that every tax payer will pay higher rates with the expiration of the 2001 and 2003 tax cuts.  The 2013 capital gains and dividend tax impact will be especially onerous for Americans who have saved and invested their income.  Inaction will also hurt small business owners and owners of appreciated real estate, who may want to sell their business or real estate.  Taxes on these investment gains would increase by 33% in 2013.

Unless there is bipartisan congressional action aimed at alleviating the negative impact of the expiration of the 2001 and 2003 tax cuts, it will be important to take action to help minimize future tax bills.  If you are planning on retiring, selling a business, selling a vacation home, or any other activity that may have a significant capital gains tax consequence, it would be wise to visit with a trusted financial advisor or tax advisor to determine how to do this in the most tax efficient manner.

There are many strategies that individuals can use to minimize their tax bills.  2012 could be a watershed year for aggressive tax planning to assure that the taxes payed in 2012 and beyond are minimized.

1. Define financial goals – Short term goals, such as a major family vacation, will occur in 1 – 2 years.  Medium term goals, such as funding a child or grandchild’s college education, are often less than 10 years, while long term financial goals, such as purchasing a second residence during retirement, are often 20+ years out.

2. Create financial statements – A business cannot run without financial statements and neither should a household.  Every household should have a Net Worth statement (financial assets less financial liabilities) and a Cash Flow statement.  One method of creating a Cash Flow statement can be found at www.FarlowFinancial.com .  On the Home Page, click on Financial Abundance Guide for a free, downloadable copy of this book.  Chapter One is dedicated to cash flow and how to track it.

3. Identify liquid assets – Using the Net Worth statement, identify all liquid assets.  Liquid assets include any asset that can be readily turned into cash and can be used to satisfy financial goals.

4. Estimate cost of each goal – For each short, medium and long term financial goal, estimate the assets required to meet the goal in today’s dollars.

Example:  If a child is expected to enter college in six years, at a cost of $20,000 per year, the financial requirement to meet that goal, in today’s dollars, is $80,000.

5. Meeting each goal – Compare current liquid assets with the cost of each goal.  If current assets are insufficient, develop a savings plan and an investment plan to increase future liquid assets.

6. Retirement – Identify financial assets that will be available for retirement, including Social Security benefits, PERA, pension funds and deferred annuities. Combine these assets with the present value of retirement savings assets (IRAs, 401(k)s etc.) to determine if adequate retirement resources will be available.  Examine various retirement scenarios, such as downsizing your house or working for more years than planned, to determine ways to meet retirement goals.

7. Risk management – Determine if you have adequate life insurance, medical insurance, disability insurance, property and casualty insurance, and long term care insurance to protect your financial resources from one of life’s unexpected occurrences.

8. Estate Planning – Meet with an estate planning attorney to protect the assets that you plan to pass on to your heirs.  Assure that proper medical directives, powers of attorney, and children’s custodians are in place.

9. Implementation – List all unresolved items from the first eight steps. Implementation requires a resolution to all outstanding issues.  Continuously address this list until the outstanding items are resolved.

10. Repeat steps 1-9 Annually – Long term financial care is a continuous process.  An annual review is critical to measure success in meeting your goals.

These ten steps are the minimum required for comprehensive financial planning, which is necessary to provide Long Term Financial Care “ensurance.”  Most people find that they have neither the interest, time nor financial planning knowledge to provide this planning for themselves.

If meeting financial goals is a concern, it may be time to consider LTFC “insurance,” in the form of a comprehensive financial plan.  Certified Financial Planners (CFPs^®), who are actively providing comprehensive financial planning services, should have the training and experience required to help guide you through this complicated process.

If you have Long Term Care insurance, you are likely paying thousands of dollars a year for the peace of mind that this insurance provides.  Why not consider paying a fraction of that cost to have the Long Term Financial Care “ensurance” that you deserve.

LTC insurance plans are well suited for people seeking peace of mind.  If you are considering LTC insurance, be sure to look at all of your options and riders available.  Some of these options include:

1) Elimination Period Type – An elimination period is the time between when a person qualifies for long term care and when the insurance begins making payments.  Only buy a policy with a “lifetime” elimination period.  The elimination period can either be calendar days or “service days.”  With in- home care, requiring a twice a week visit from a provider, the service day elimination period count is only 2 days per week.  Typically it is better to have a calendar day approach to elimination periods.

2) Elimination Periods length – Lifetime elimination periods range from 0 days to 365 days.  The longer the elimination period, the lower the policy cost.  By approaching LTC insurance as “catastrophic coverage,” an elimination period of 180 or 365 days may be very cost effective.  If retirement funds will likely be available to cover the long elimination period, the lower priced LTC insurance will protect you against the unlikely event of long term medical care being required over several years.

3) Inflation Protection – Inflation protection riders come in both simple and compounded inflation varieties.  Inflation protection riders are very important to younger purchasers of LTC insurance.

4) Shared Care – With a shared care rider, a couple can have LTC insurance that will pay for either or both spouses requiring long term care, up to the policy maximum.  Since the odds of both partners requiring extensive long term care is small, this rider is a good option for many couples.

Like other insurance products, your health status may not allow you to qualify for LTC insurance at any price. Or, you may be able to “self insure” for LTC expenses.  Let’s look at some alternatives to LTC insurance.

1)  Whole Life Insurance – If a substantial whole life insurance policy is being considered, buy a policy with an accelerated benefit rider, which can provide both life insurance and long term care insurance.  Accelerated benefits are proceeds paid to the policyholder from a life insurance policy, before he/she dies.  These proceeds can be used for long term care expenses.  Accelerated payments could be for as much as the face value of the life insurance policy.  However, if proceeds are used for long term care expenses, the total amount paid on the policy will likely be reduced, due to the early payout of funds.

2) Deferred Annuity – If a deferred annuity is being considered, buy one with a LTC rider.  This option can be especially useful when a LTC policy is desired, but the policyholder is denied LTC coverage due to existing health issues.

3)  Charitable Remainder Annuity Trust (CRAT) ­– For the charitably inclined, appreciated securities could be donated to a CRAT.   The CRAT provides a fixed annual payout.  The annual funds from the CRAT could then be used to fund annual LTC insurance premiums.  This approach removes assets from an estate, provides for a charitable tax deduction, and provides guaranteed funds to pay for LTC insurance.

4) Self Insure with your home – By retirement years, many people will have their home mortgages paid.  If one spouse requires long term care, a reverse mortgage can often supply up to ½ of the home’s value.  If the second spouse requires long term care, the sale of the house can help provide additional funds for LTC.  This approach can even be combined with a LTC insurance policy having the “shared care” rider for added protection.

Long Term Care expenses can be frightening.  It is important to remember that when someone requires long term care, many of their previous expenses may be eliminated.  By working with a skilled financial professional, you can determine the most cost effective manner to provide for long term medical care, if it is ever required.

Unfortunately, this approach may be very costly if a financial emergency occurs or if tax deferred funds are needed for your children’s college expenses.  Here are some tips that may help when deciding where to put your savings:

1. If your company offers a company match on their 401(k) or 403(b) plan, always save up to the company match limit.  Whether the company match is 50% or 100% of your contribution, take the “free money” offered by the plan. If your company’s contribution is their own corporate stock, invest the remainder into a well diversified portfolio with no company stock.  When the company’s stock contribution may be exchanged, sell the company stock and put these funds into the diversified portfolio.  A one word reminder of why this is important is “Enron.”
2. An emergency fund, available to cover at least six months of expenses, is the next savings priority.  Forgo a tax deferral on an IRA or additional 401(k) contributions until these funds are in place.
3. Roth IRA contributions are extremely flexible.  While Roth IRA contributions are not tax deductible, all contributions to a Roth IRA can be withdrawn at any time without any taxes or penalty.  If $20,000 has been contributed to a Roth IRA over a four year period and the Roth IRA is now worth $25,000, $20,000 may be withdrawn with no taxes or penalties, regardless of your age.
4. IRAs provide more investment flexibility and typically have lower fees than 401(k) or 403(b) plans.  Assuming an emergency fund in place, after contributing to the company matching limit with a 401(k) plan, additional savings could be used to fund a traditional IRA.  This approach is only available to a married, jointly filing tax payer with income below $92,000.  If income is above $92,000 but below $173,000 a Roth contribution might be appropriate.
5. A married, jointly filing tax payer, who does not participate in an employer’s retirement plan but whose spouse does, may make a fully deductible contribution to an IRA if joint income is below $173,000 in 2012.
6. Whether or not a married, jointly filing tax payer is covered by a company retirement plan, an annual $5,000 ($6,000 if over age 50) contribution to a Roth IRA is available if income is below $173,000.
7. Be cautious of Stable Value funds.  With the market volatility of the past few years, many people in 401(k) or 403(b) plans have found refuge in stable value funds.  One should exercise caution with these funds as they often have restrictions on your ability to reallocate money placed in these funds

A major 401(k)/403(b) plan sponsor is TIAA-CREF.  The traditional TIAA plan is a Stable Value fund with a guaranteed a rate of return that changes annually.  Funds invested in the traditional TIAA Stable Value fund, are similar to entering “Hotel California.”  Once they are deposited in this Stable Value fund, they may  only be removed over a ten year period.  The maximum yearly withdrawal from a TIAA traditional fund is limited to 10% of the funds available.  Since market conditions and personal financial conditions may change, be very cautious when considering placing a significant amount of retirement plan funding into what may effectively be an illiquid investment, if the funds are required within ten years.

Due to the many restrictions, contribution limits, and penalties associated with tax deferred retirement plans, it is important to carefully consider your savings alternatives.  Working with a qualified financial adviser who, as your fiduciary, always places your interests first, develop a strategy that both minimizes taxes and provides for penalty free funds that may be required before your retirement years.

As part of the financial planning process, our clients are asked to complete a “Budget Worksheet.”  This worksheet helps our clients identify the areas in which they spend their financial resources.   It also helps clients compare their income with their spending, in order identify the amount available for savings.

Sometimes, clients discover that the worksheet exercise identifies more cash for savings than is actually available.  When this occurs, it is often because what they think they are spending and what they are actually spending are very different amounts.  At that point, it is important to more carefully identify actual expenditures by budget category.

A simple way of determining the amount of expenditures in each of the various budget categories is with budgeting software, such as “Mint.com.”  Software solutions keep track of daily expenses by category.  By collecting this information over a three month period, one begins to develop a much better understanding of their expenses.

Solutions, such as Mint.com, require that you provide account numbers and passwords for all bank and credit card accounts.   Some people are uncomfortable with providing this information on the internet.  If you are one of those people, let’s look at another method to better understand your expenses.

At the beginning of the month, set aside a “cash kitty” to pay for all expenses of under $10-$20.  All other expenses will be put onto (a maximum of two) credit cards.   When the credit card statement is received, determine an expense category for each entry.  My book, Financial Abundance Guide, has a list of suggested expenses categories and is available free at our website, FinancialAbundanceGuide.com.

Expenses under $10-$20 will be paid in cash, with the total cash expenses reconciled at the end of each month.  The monthly “cash kitty” expenses will be labeled as “miscellaneous expenses.”  Using the tabulated credit card statements, monthly expenditures by category are calculated.  These totals, by expense category, can be entered into an Excel spreadsheet with a row for each expense category and a column for each month.

At the end of three months, sum each expense category.  If, during the three month period, there are expenses that occur only on a yearly or biannual basis, remove these expenses from the monthly amount and label these, either “yearly expenses” or “biannual expenses”.  Identify any yearly or biannual expenses that did not occur during the three month period and include those expenses into the yearly or biannual expense category.  Yearly and biannual expenses could include annual vacations, insurance payments, property tax payments, etc.

Multiply the quarterly expenses by four and the biannual expenses by two.  Combine quarterly, biannual, and yearly expenses to provide a yearly expense budget by category.  Upon completing this exercise, you will have a much better understanding of annual expenses and the funds that should be available for annual savings.

Once the budgeting exercise has been completed, it is possible to determine:

1. If the amount being spent by category is consistent with your financial goals.
2. If categories of spending are significantly different from expectations.  If so, could some of these funds be used for savings?

Understanding spending habits is an important component of the financial planning process.  Once spending is well understood, we are able to better determine if we are well positioned to meet our short, medium, and long term financial goals.  The sooner we begin to understand our spending habits, and, when appropriate, to modify these habits, the better prepared we will be to meet such important financial goals as funding our children’s college education and adequately saving for retirement.

Often, the beneficiary has a difficult time treating their inheritance as their own.  As a financial adviser, one of my primary responsibilities is helping clients to appreciate that an inheritance belongs to them and should be treated as well as, if not better than, any other financial assets that they possess.

Below are some common reasons why beneficiaries, often times, do not provide the appropriate care and attention to their inherited resources:

1. Guilt – Beneficiaries often feel guilty about their inheritance, sometimes believing that they are not worthy of the inheritance or feeling guilty that the grantor had not spent more of the funds on him/herself.  It is important for beneficiaries to realize and accept that they would not have received these gifts had the deceased not wished them to have them.  Many parents of baby boomers held the belief that it was their responsibility to leave an inheritance for their children.  As the beneficiary, it is your responsibility to gratefully accept this generous gift and to use the inherited funds to make your life more financially abundant.
2. “I did not earn it” – Where a person may take full responsibility for the financial resources that they have earned, the fact that an inheritance is “unearned income” often accompanies a reluctance to treat these resources as carefully as earned income.  The ramifications of this perspective will often take one of these directions for the beneficiary.  Some people will endeavor to spend this “unearned” inheritance as quickly as possible.   This often leads to extravagant purchases that are later regretted. The other common direction is to effectively ignore the inherited funds, without ever incorporating them into personal financial resources.
3. “Dad/Mom would not want me to change their investments” – In this scenario, the beneficiary will likely keep their inherited funds invested exactly as they were when inherited.  The beneficiary often believes that the deceased would want the funds left in the same investments that they inherited.  Even if the deceased was still an active and capable investor up until their death, the most appropriate way to honor their capable investment management would be to continue to have these funds actively managed in a style that meets your goals and objectives.

If you have inherited funds or expect to inherit funds in the future, it is important to honor this inheritance by treating the inherited funds as your savings.  Unless the deceased’s will contains specific instructions to the contrary, they would want you to treat these funds as respectfully as possible in enhancing your own financial abundance.

As the beneficiary, you and only you are responsible for inherited funds.  You may be tempted to leave the inherited funds with the current brokerage firm that a parent or other relative may have used out of respect.  Unless you know that you can trust and have a personal relationship with the deceased’s broker, who can provide you with the full financial planning support that you require, it will be in your best interest to interview other financial professionals and find the person who is best suited to help you meet your family’s financial goals.

If you have a financial plan, have your advisor incorporate the inheritance into the plan.  This will likely allow you to expand your goals and objectives. If you do not already have a trusted financial advisor, consider getting a comprehensive financial plan, provided by a fee only Certified Financial Planner (CFP^®).   A comprehensive financial plan will include your life’s goals and objectives and help you determine how your current savings, plus the inherited funds, can help you meet all of your financial goals.

If you are one of the fortunate baby boomers who either has or will receive a significant inheritance, use this wonderful gift as a tool to help you obtain the financial abundance that you desire and the deceased would have wanted for you.

1. Section 529 College Savings Plans

Section 529 College Savings Plans allow a one year donation up to $65,000 per person, to each potential beneficiary.  While the donor does not have “direct control” of the plan’s contributions/earnings, the donor can choose among the limited number of investment options available in the chosen 529 Plan.  Investment options can be changed as often as every 12 months and the account beneficiary may be changed to another qualifying family member at any time.

Distributions from the Section 529 College Savings Plan can be used for any qualified higher education expenses, including tuition, books, fees, equipment, special needs services, and/or room and board costs.  All distributions that are used for qualified college expenses are never taxed.  Thus, the growth and income from a 529 Plan are tax free, as long as the funds are used for qualified college expenses.

For Colorado residents, a Colorado income tax deduction is available for contributions to the Colorado College Invest Plan.  If you contribute $20,000 to a child’s or grandchild’s College Invest 529 Plan in 2012, you will be able to deduct $20,000 from your 2012 Colorado income taxes.

2. Coverdell Educations Savings Accounts

A Coverdell Educations Savings Account (ESA) allows for annual non-deductible contributions of up to $2,000 per year for each child that is age 18 and under.  Parents with three children can save up to $6,000 annually in Coverdell ESAs for their children’s education.  A Coverdell ESA is similar to an IRA, where most custodial firms, such as Schwab, Ameritrade, etc. provide low or no cost ESA accounts.   When used for qualified educational expenses, Coverdell ESA funds can be withdrawn on a tax free basis.  The investments allowed with a Coverdell ESA are virtually unlimited, which may provide for a better investment return than the limited selection of funds offered in a 529 Plan.

3. Series EE Bonds and Series I Bonds

While the current return is very low on both Series EE and Series I Savings Bonds, they virtually guarantee that slightly more than the original amount invested will be available when withdrawn.  When used for qualified educational expenses, the interest that is earned on these government backed savings bonds is received tax free.

4. Maximize College Aid

The most important single year for maximizing the potential of receiving college aid is the year that begins on January 1st of the student’s junior year in high school.  This is often called the “base income year” for financial aid.  During this financial year, parents should accelerate all expenses possible, including paying property and income taxes for the following year. It is also important to minimize your controllable income and capital gains during this year.

Another method for lowering income is to maximize retirement contributions during the base income year.  Retirement contributions are not considered as income, and retirement savings assets, held in a qualified retirement plan, are not considered as financial resources available for college tuition by financial aid assessors.

A final tip for maximizing financial aid is to minimize the assets owned by your children. 20% of a student’s assets are considered available for college funding, as opposed to only 5.64% of parental assets.  If your child has a UTMA or UGMA account, it might be advisable to roll these account assets into a 529 College Savings Plan, with your child as the plan beneficiary.  This approach will significantly reduce the amount of assets that will be counted against available college aid funds.

Planning is the key to successfully maximizing the funds that will be available for your children’s education.  An excellent website to gather more information on this is www.savingforcollege.com .   Every parent and grandparent wishing to help fund their children’s college education should work with their financial adviser to devise the best possible plan to maximize college savings funds.

The single, most important step you can take to assure that your tax deferred retirement account, which I will hereafter call an IRA, can be inherited with maximum tax flexibility is to fill out the account’s beneficiary form.  Contact your IRA custodian and verify that you have a named beneficiary.

IRAs Inherited from your spouse. The most flexible inherited IRA is one that is inherited from your spouse.  Typically, the best approach for an inherited spousal IRA is to roll the assets into your own IRA.  These assets can either be comingled with an existing IRA or put into a new IRA in your name.

Due to the unique treatment of inherited spousal IRAs, it may be better to transfer the IRAs assets into an inherited IRA if:.

1) you are older than your spouse and your spouse died before age 70½.  This option would allow you to delay taking the minimum required distributions (MRDs) until the year your spouse would have turned age 70½.

2) you are younger than age 59½ and you need access to the IRA assets immediately.  An inherited IRA allows you to withdraw funds and not be subject to the 10% early withdrawal penalty that would apply to your own IRA.

Whether an inherited IRA is spousal or non spousal, be sure that it is properly retitled.  A suggested format is: “John Smith, Deceased (date of death), IRA F/B/O  (for benefit of) Mary Smith, Beneficiary.”

IRAs Inherited, other than spouse. If you inherit an IRA from a parent or other relative, you cannot roll it over into your own IRA.  To have continued tax deferred treatment of the inherited IRA assets, you must set up a properly titled inherited IRA.  The inherited IRA must be established by December 31 of the year following the year of the deceased’s death.

Once the inherited IRA is properly titled, you will have two distribution options:

1) The entire IRA must be distributed by December 31 of the fifth year following the year of the owner’s death.  If the owner died in 2011, all of the IRA must be distributed by 2016.  The timing(s) of this distribution is entirely up to the beneficiary, as long as all assets are distributed by the end of the fifth year.

2) The inherited IRA can be paid out over the life expectancy of the beneficiary, starting in the year following the owner’s death.  If the owner is over 70½ , the required minimum distribution (RMD) must also be taken for the year in which the owner died.

If the beneficiary of an IRA is a qualified trust, the two distribution options shown above apply.  However, if the beneficiaries of the trust include multiple people, the life expectancy that must be used in option 2) is the life expectancy of the oldest beneficiary.  However, if the IRA is left directly to the multiple beneficiaries, each beneficiary can choose their distribution option and the life expectancy distribution will be based on the age of each beneficiary.

Unless the inherited IRA has a “basis” (some of the contributions were made with after tax funds) all IRA distributions are taxable.  Distributions from inherited IRAs are never subject to the 10% early distribution penalty, regardless of the age of the beneficiary at the time the distribution occurs.

Inheriting a Qualified Roth IRA. A beneficiary may receive all of the assets in a qualified Roth IRA as a tax free lump sum.  However, a beneficiary has the option of establishing an inherited Roth IRA with the Roth proceeds.  With an inherited Roth IRA, the beneficiary will only be required to take a yearly distribution, based on their current age.  This allows the Roth proceeds to continue to grow on a tax free basis, throughout the beneficiary’s lifetime.

Be sure to verify that all of your retirement accounts have a named beneficiary.  If you inherit and IRA of any type, seek advice from a qualified professional before taking any actions .

The goal of any retirement plan is to live throughout the retirement years without depleting retirement savings.   An abundant retirement provides adequate income to continue living the current lifestyle plus additional funds to better enjoy retirement through additional activities such as travel and hobbies.   As there is a 40% probability that at least one person in a healthy 65 year old couple will live an additional 30 years, providing for an abundant retirement requires advanced financial planning.

One factor that is not often fully appreciated in retirement planning is the large “cost” of early retirement.  However, if you are actively saving for your retirement years, there is  a seldom explored option to early retirement.

The goal is often to retire at age 62, the earliest age at which Social Security payments are available.  An option to taking this early retirement is to stop making contributions to your retirement plan saving at age 62 and use these funds to better enjoy your final working years.  By doing this, retirement savings continue to grow, Social Security payments continue to increase by approximately 8% per year and your pre-retirement years can include the travel and hobbies that may have previously been unaffordable.

Let’s consider an example of how this option can help assure an abundant retirement:

Mary and John Smith, both age 61, have a combined income of $100K per year.  Throughout their careers they have saved 15% of their pretax earnings, providing them with $800K in retirement savings.  At their full retirement age (FRA) of age 66, their combined Social Security benefits will be $40,000 per year.  They have determined that they will need $80K per year to live the abundant retirement that they desire and would like to begin retirement when they are age 62 and eligible for Social Security benefits.

If John and Mary retire at age 62, their annual Social Security benefits will be reduced to $30,000.  They will need to spend $50,000 per year from their retirement savings to provide the required $80K in annual income.  Assuming no inflation and a 3% real rate of return on their investments, John and Mary could deplete their funds in 22 years, when they are only age 84.

Since both John and Mary are in good health, there is a very high probability that one or both of them will live past age 84.  They must reconsider other options if they wish to have the desired abundant retirement.

Mary and John meet with their financial planner to explore other retirement options.  Their planner suggests that they continue working until their Social Security FRA age of 66.  However, he also suggests that instead of continuing to save for retirement, they use their annual $15K in retirement savings for vacations and new hobbies that they have been postponing due to lack of funds.

When John and Mary retire at age 66, their $800K in savings, growing at just 3%, will have grown to $900,407.  At age 66, they will receive their full Social Security benefits of $40,000 annually, reducing the annual savings withdrawal to $40,000 per year.  With these changes, John and Mary’s savings will now last for 38 years.

By working an additional 4 years and spending their annual retirement savings of $15K on vacations and hobbies, John and Mary will be able to live an abundant retirement and never deplete their savings.

If your company offers a 401(k) match, continue to contribute to your 401(k) up to the company matching amount.   Take the amount contributed to your 401(k) plan out of a taxable investment account.  You will still come out ahead thanks to the “free money” contributed by your employer’s match

Retirement options need to be explored before you retire.  Work with a qualified financial planning professional to explore all of your retirement options.  A relatively small change can make a huge difference in your ability to have and maintain an abundant retirement.