Retirement Archives - Seacure Advisors

Accessing Money from Employer-Sponsored Retirement Plan

February 4, 2019 By SeaCure Advisors Leave a Comment

Using retirement funds to pay for college

As the name suggests, an employer-sponsored retirement plan is a plan that an employer sets up and maintains for its employees’ retirement. A qualified retirement plan is an employer-sponsored retirement plan that receives special tax treatment under federal law. 401(k) plans and profit-sharing plans are common examples of qualified employer-sponsored retirement plans.) The tax benefits of a qualified plan generally include pretax contributions and tax-deferred growth of investment earnings. In return for such benefits, qualified plans generally must comply with specific federal rules set forth under the Employee Retirement Income Security Act (ERISA) and the Internal Revenue Code (IRC).

If your employer offers a qualified retirement plan and you have money in the plan, this may be a source of funds for college expenses. However, most financial professionals recommend tapping retirement accounts for college expenses only as a last resort.

How do you access the money in your employer-sponsored retirement plan?

There are two possible ways to access funds in your employer retirement plan: borrowing or withdrawing. However, not all employer plans may allow borrowing.

Plan loans

Some employer-sponsored plans allow you to borrow against the funds in your plan, as long as you have a vested balance in the plan. The amount of the loan you can take is generally limited to the lesser of $50,000 or one-half of your vested plan benefits. The advantage of plan loans is that they are not taxed or penalized like withdrawals, as long as the loan is repaid on time. Also, the interest rate is usually reasonable (e.g., one or two points above the prime rate), and the interest you pay is credited to your own plan account.

Drawbacks? If you do not repay a plan loan when required, it will generally be treated as a taxable distribution. Typically, you have to repay the loan within five years by making regular payments, at least quarterly. (The repayment period can be longer if the funds are used to purchase a primary residence.) Even worse, if you leave your employer’s service (whether voluntarily or not) and still have an outstanding balance on a plan loan, you may have to immediately repay the loan in full. Other disadvantages are that the interest is usually not tax deductible, and the borrowed funds miss out on tax-deferred growth opportunities.

Plan distributions

Another option is to withdraw funds from your employer-sponsored retirement plan. Your first step should be to find out your distribution options. Your plan may offer several methods of taking distributions, or your choices may be very limited. Consult your plan administrator to find out which distribution options from your retirement plan (if any) are available to you.

In general, you can take distributions from your plan upon certain specified events. For example, you may be entitled to take distributions when you retire, or when you reach the plan’s normal retirement age. You may also be entitled to take a distribution upon job termination, disability, plan termination, or financial hardship. Depending upon the type of retirement plan and the provisions of the plan, you may be eligible to receive certain distributions while you are still working for your employer as well as after your employment has ended. However, some plans may only allow distributions after your employment has ended.

Unlike plan loans that are repaid on time, distributions you take from an employer-sponsored retirement plan generally must be included in your taxable income for federal (and possibly) income tax purpose. Any plan distribution you receive will increase your taxable income for the year of the distribution, possibly even pushing you into a higher federal income tax bracket. In addition to ordinary income tax, you must also pay a 10 percent premature distribution penalty tax if you are under age 59½ at the time of the distribution (unless an exception applies).

If you have ever made any after-tax contributions to your employer’s retirement plan, those amounts will not be included in your taxable income when distributed from the plan. Consult a tax advisor for further details.

How do you know if this strategy is right for you?

Unlike a traditional IRA or a Roth IRA, a qualified employer-sponsored retirement plan offers no special advantages to parents who use the money to fund higher education expenses. If you are faced with a choice between withdrawing or borrowing from your plan, borrowing is generally the better of the two options.

There are typically no taxes or early withdrawal penalties on a plan loan, and you will eventually replace the money in the future. Plus, the interest rate is relatively low, and you are essentially paying interest to yourself. Yet this does not necessarily mean that borrowing from your plan is a good idea. The loan must be repaid in regular installments within five years, which may create a strain on your budget, and the interest you pay is not tax deductible in most cases. You also lose out on tax-deferred growth opportunities when you borrow from the plan. Under most circumstances, this is probably not the best option for funding your child’s private school or college tuition.

Plan withdrawals fare even worse, assuming they are even available to you. If you have other options available (including loans from your plan), you probably should not even consider withdrawing money from your employer’s plan. A plan withdrawal will generally be included in your taxable income (excluding any portion that represents after-tax contributions to the plan), and may push you into a higher income tax bracket. You may also have to pay a 10 percent premature distribution tax if you are under age 59½. Finally, unlike a plan loan, a plan withdrawal cannot be repaid. Nevertheless, plan withdrawals may be a ready source of cash if your plan does not allow loans, you have few other assets, and you believe you’ll have trouble borrowing elsewhere (due to poor credit, for example).

What Will You Pay for Medicare in 2019?

January 21, 2019 By SeaCure Advisors Leave a Comment

Medicare premiums, deductibles, and coinsurance amounts change annually. Here’s a look at some of the costs that will apply in 2019 if you’re enrolled in Original Medicare (Part A and Part B).

Medicare Part B premiums

According to the Centers for Medicare & Medicaid Services (CMS), most people with Medicare who receive Social Security benefits will pay the standard monthly Part B premium of $135.50 in 2019. However, if your premiums are deducted from your Social Security benefits, and the increase in your benefit payments for 2019 will not be enough to cover the Medicare Part B increase, then you may pay less than the standard Part B premium.

People with higher incomes may pay more than the standard premium. If your modified adjusted gross income as reported on your federal income tax return from two years ago is above a certain amount, you’ll pay the standard premium amount and an Income Related Monthly Adjustment Amount (IRMAA), which is an extra charge added to your premium, as shown in the following table.

You filed an individual income tax return for 2017 with income that was:	You filed a joint income tax return for 2017 with income that was:	You filed an income tax return for 2017 as married filing separately with income that was:	Monthly premium in 2019 including any IRMAA is:
$85,000 or less	$170,000 or less	$85,000 or less	$135.50
Above $85,000 up to $107,000	Above $170,000 up to $214,000	N/A	$189.60
Above $107,000 up to $133,500	Above $214,000 up to $267,000	N/A	$270.90
Above $133,500 up to $160,000	Above $267,000 up to $320,000	N/A	$352.20
Above $160,000 and less than $500,000	Above $320,000 and less than $750,000	Above $85,000 and less than $415,000	$433.40
$500,000 and above	$750,000 and above	$415,000 and above	$460.50

Other Medicare costs

Other Medicare Part A and Part B costs in 2019 include the following:

The annual Medicare Part B deductible for Original Medicare is $185.
The monthly Medicare Part A premium for those who need to buy coverage will cost up to $437. However, most people don’t pay a premium for Medicare Part A.
The Medicare Part A deductible for inpatient hospitalization is $1,364 per benefit period. An additional daily coinsurance amount of $341 will apply for days 61 through 90, and $682 for stays beyond 90 days.
Beneficiaries in skilled nursing facilities will pay a daily coinsurance amount of $170.50 for days 21 through 100 in a benefit period.

For more information on costs and benefits related to Social Security and Medicare, visit ssa.gov andmedicare.gov.

Links To Ring In 2019

January 3, 2019 By SeaCure Advisors Leave a Comment

Welcome to our first blog post of 2019! Below are some links regarding financial planning for retirement, financial concerns for college, and general financial education. Hopefully these help shake off the holiday cobwebs and get your year off on the right foot.

Current Events

Our friends at Formula Folios have provided some valuable insights regarding the recent stock market volatility we’ve experienced. They include an excellent quote to steady your nerves as both news headlines and financial markets provide anything but reassurance:

Your success in investing will depend in part on your character and guts and in part on your ability to realize, at the height of ebullience and the depth of despair alike, that this too, shall pass.
– Jack Bogle

Annuities

While on the subject of volatility and uncertainty in the financial world, one of the instruments people at or near retirement often ask about is annuities. Depending on your goals, they may provide you with certainty that you’ll never run out of money. However, like all insurance products, they are complex and, in general, not well understood by the general public as well as investment and money managers. Fortunately, the New York times has provided an article to explain annuities as simply as possible, as well as a list of questions to ask someone trying to sell you one.

Interest Rates

Interest rates are in the news a lot lately. Headlines about the Federal Reserve raising rates are commonplace. But what does any of this mean, and how does it affect average people like you and me? The good folks at The Street have provided an article explaining the different types of interest rates and why they are so important.

College Costs and Planning

Lastly, on the college front, it’s no secret that college costs are skyrocketing. Tuition inflation is the highest of all categories of inflation, approximately doubling the rate of inflation of healthcare. However, there are some schools here in the United States that are bucking that trend (including one here in Kentucky), and offer students free or reduced tuition. The good folks at Forbes have been kind of enough to provide a list of 75 such schools.

If none of those schools spark the interest of your college-bound children, then you’re probably thinking about college scholarships being a major part of your college financial plan. You aren’t alone. Before assuming scholarships will solve your college cost issues, take a look at this deep dive into the grant and scholarship landscape. Once again Forbes has come through with an excellent in-depth breakdown of the different kinds of scholarships out there and how they may or may not fit within your college plan.

Thanks for taking the time to read our blog and please let us know if there’s a topic you’d like to see covered or a question you want answered. Happy New Year from all of us here at SeaCure Advisors! We hope your 2019 is healthy and successful.

Year End Charitable Giving

December 12, 2018 By SeaCure Advisors Leave a Comment

With the holiday season upon us and the end of the year approaching, we pause to give thanks for our blessings and the people in our lives. It is also a time when charitable giving often comes to mind. The tax benefits associated with charitable giving could potentially enhance your ability to give and should be considered as part of your year-end tax planning.

Tax deduction for charitable gifts

If you itemize deductions on your federal income tax return, you can generally deduct your gifts to qualified charities. This may also help you potentially increase your gift.

Assume you are considering making a charitable gift of $1,000. One way to potentially enhance the gift might be if you increase it by the amount of any income taxes you save with the charitable deduction for the gift. With a 24% tax rate, you might be able to give $1,316 to charity [$1,000 ÷ (1 – 24%) = $1,316; $1,316 x 24% = $316 taxes saved]. On the other hand, with a 32% tax rate, you might be able to give $1,471 to charity [$1,000 ÷ (1 – 32%) = $1,471; $1,471 x 32% = $471 taxes saved].

However, keep in mind that the amount of your deduction may be limited to certain percentages of your adjusted gross income (AGI). For example, your deduction for gifts of cash to public charities is generally limited to 60% of your AGI for the year, and other gifts to charity are typically limited to 30% or 20% of your AGI. Charitable deductions that exceed the AGI limits may generally be carried over and deducted over the next five years, subject to the income percentage limits in those years.

Make sure you retain proper substantiation of your charitable contribution. In order to claim a charitable deduction for any contribution of cash, a check, or other monetary gift, you must maintain a record of such contributions through a bank record (such as a cancelled check, a bank or credit union statement, or a credit card statement) or a written communication (such as a receipt or letter) from the charity showing the name of the charity, the date of the contribution, and the amount of the contribution. If you claim a charitable deduction for any contribution of $250 or more, you must substantiate the contribution with a contemporaneous written acknowledgment of the contribution from the charity. If you make any noncash contributions, there are additional requirements.

Year-end tax planning

When making charitable gifts at the end of a year, you should consider them as part of your year-end tax planning. Typically, you have a certain amount of control over the timing of income and expenses. You generally want to time your recognition of income so that it will be taxed at the lowest rate possible, and time your deductible expenses so they can be claimed in years when you are in a higher tax bracket.

For example, if you expect that you will be in a higher tax bracket next year, it may make sense to wait and make the charitable contribution in January so that you can take the deduction next year when the deduction results in a greater tax benefit. Or you might shift the charitable contribution, along with other deductions, into a year when your itemized deductions would be greater than the standard deduction amount. And if the income percentage limits above are a concern in one year, you might consider ways to shift income into that year or shift deductions out of that year, so that a larger charitable deduction is available for that year. A tax professional can help you evaluate your individual tax situation.

A word of caution

Be sure to deal with recognized charities and be wary of charities with similar-sounding names. It is common for scam artists to impersonate charities using bogus websites and through contact involving email, phone, social media, and in-person solicitations. Check out the charity on the IRS website, irs.gov, using the Tax Exempt Organization Search tool. And don’t send cash; contribute by check or credit card.

Your Questions Answered

August 14, 2018 By SeaCure Advisors Leave a Comment

Carolyn Howard, CFP® shares her insights in response to reader questions on Investopedia Advisor Insights:

Q: I have a 401(k) with my new employer; should I roll my traditional IRA into my new 401(k) account?

I was advised to roll my 401(k) plan from a previous employer into a traditional IRA, which I did. I haven’t made any contributions to it since rolling it over, and it has grown very little. I have a 401(k) with my new employer; should I roll my traditional IRA into my new 401(k) account? I feel that if I combine them, my money and 401(k) will grow the most. I was advised to leave my traditional IRA at the company that it is at, so I am not sure what my best option is.

A: You can choose to leave your rollover IRA as is. You have more flexibility in your investment options with the IRA. You can also choose to put it into your new 401k if you like the choices available for investing. Having only one account can provide simplicity when making investment decisions. Your choices are dependent on what you want to do. The growth on your IRA and 401k are dependent on your investment choices and asset allocation. If both the IRA and 401k have the same asset allocation and similar funds, they should grow at the same rate. Your decision is more of a personal decision than an investment decision.

Q: Does the IRS call you and accuse you of fraud and ask you for money?

I received a call from a woman who gave me her name and an ID number informing us that the IRS is charging us with fraud and that we owe them $8,140. We are retired on Social Security and have not owed any taxes for more than fifteen years. Is this a scam?

A: It is excellent that you are asking this question. The IRS does not call you and inform you of anything. This is a SCAM. You can contact the IRS directly and inquire of this information. This person that called is just trying to steal money from you. You should be very proud of yourselves for being aware of these kinds of calls. Keep up your good work.

Update: Police in India have recently arrested several people in connection with this scam.

Q: Should I use annuities as a temporary investment?

I invested in a four-year fixed annuity several years ago to allocate a percentage of my portfolio into a vehicle that was conservative. At the time, it was the safest, risk-free investment recommended by my investment adviser. The annuity is set at 4 percent annually. I am a long-term aggressive investor who makes about 12-15 trades a year. My retirement horizon is between 2-5 years away from now. Is this a safe strategy going forward?

A: Annuities can be useful as a bond alternative especially as interest rates are rising. If you have bonds as part of your portfolio, the bonds or bond funds could be losing value since bond prices decline as rates rise. You state the annuity is earning 4%/year. As you approach retirement, the 4%/year with downside protection during market corrections could be a valuable part of your retirement strategy. You may consider your retirement goals as you near that target in 2-5 years. One of the things to consider are your income needs during retirement and the risk tolerance during withdrawal years. With your “long term aggressive strategy”, you may experience a market downturn during the withdrawal period that could ultimately impact your lifestyle. You would not have that risk with the annuity. Consult your investment advisor to review your retirement goals, income needs, and the amount of risk your income needs can tolerate.

Q: What does “period certain” mean on an annuity contract?

Period Certain on an annuity contract can mean a couple of different things. It could mean that you have a guaranteed amount of time to receive the income from the annuity when you begin taking the income. You make this decision when you purchase the annuity. If you should predecease that time frame, your beneficiaries would be eligible for the remainder of the income. Another common use of period certain is when you buy an annuity and choose at application time that you want a lifetime income with a period certain, for example, of 20 years. You will be given a lifetime income by the annuity company but if you should predecease the 20 year period certain, your beneficiaries would be eligible for the remainder of the income. You can also choose to receive a lifetime income without a period certain. You will receive the maximum income payout with a lifetime income without the period certain. There are options that insurance companies have for the various types of annuities. Please review them carefully.

To read all of Carolyn’s answers to reader questions on Investopedia, click here.

If you have questions regarding your financial situation that you would like to discuss in person or on a video conference with a SeaCure representative, please contact us and request a free consultation.