quick reference guide · 246 266 . compliance/operations —mike hartman claudia vecchi jocelyn...

Northeast Planning Associates, Inc.

This reference guide is created for Northeast Planning Associates

Advisors and Staff use only. Use with the General Public is prohibited.

2018

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© 2018 Northeast Planning Associates, Inc.

All rights reserved.

This reference guide is created for

Northeast Planning Associates Advisors and Staff use only.

Use with the General Public is prohibited.

Northeast Planning Associates, Inc. Page 3 Northeast Planning Associates, Inc.

Quick Reference Guide

Table of Contents

NPA Extensions 6

Section I: 2018 Updated Tax Information

Tax Cuts and Jobs Act - Individuals 9

Tax Cuts and Jobs Act - Businesses 10

Employee Benefit Limits 11

IRA Contribution Limits 12

2018 Income Tax Brackets - Individuals and Trusts/Estates 13

2018 Gift & Estate Tax Information 14

2018 Gift Tax Exclusions, SS Taxation and Offset Provisions 15

Tax-Qualified Long-Term Care Insurance Summary 16

Medicare Tax on Net Investment Income & Tax Free Policy Exchanges 17

Section II: Government Benefits

When to Take Social Security Benefits 21

Effect of Retirement Age on Social Security Benefits 23

How Work Affects Social Security Benefits 24

Useful Social Security Information 25

SS Retirement & Survivor Benefit Tables 26

Medicare 28

Medicaid Provisions 31

Section III: IRAs, Qualified Plans & Employee Benefits

Qualified Plan/IRA Rollover Options 37

Getting through the IRA Maze - 2018 38

Required Minimum Distributions 41

Uniform Lifetime Table to calculate RMDs 43

Single Lifetime Table to calculate RMDs 44

Retirement Plan Distributions Prior to 59 1/2 45

Taxation of Roth IRA Distributions 47

Back Door Roth IRA Contribution 48


Table of Contents

Waiver of 60-Day Rollover- Self-Certification 49

Roth IRA Conversion Factors to Consider 49

Roth Conversion Decision Tree 50

Trusteed IRA 51

Incentive and NQ Stock Options 51

Comparative Features FSA, HRA, HSA 52

Section IV: Education Planning

Qualified Tuition Savings Plans (529) 57

Superfunding a 529 & Internet Resources 59

Section V: Estate & Charitable Gifting

Estate & Gift Tax Information 63

Transfer on Death Titling 64

Charitable Remainder Trusts 65

Charitable Lead Trusts 66

Section VI: Financial Concepts

CPI & Inflation Tables 71

Tax Exempt vs Taxable Income 73

Financial Destinations - Rates of Return for Each Time Period 74

Accumulating One Million Dollars 75

Savings Early vs. Saving Late 76

Bond Maturity vs. Duration 77

Rule of 72 & Rule of 115 & 2017 Market Results 78

Sustainable Withdrawal Rates 79

Notes 81

The Planning Center 82


Receptionist 200

CEO’s Office—Ed Hiers 300

President’s Office—Ben Hiers 234

Assistant to CEO/President—Ruth Etelman-Smith 225

Corporate Development/

Integrated Partners—Chris Soucy 211

The Planning Center—Matt Eaton

Marie Smith

Andrew Doughty

227

301

228

Virtual Assistant—Deb Dussault 236

Technology—Joe Lemire 248

Marketing—Bryan Harms

Megan Ayers

246

266

Compliance/Operations—Mike Hartman

Claudia Vecchi

Jocelyn Lockwood

212

208

240

Accounting—Rachel Lessard 232


43 Constitution Dr.

Bedford, NH 03110

(603) 471-0900 - FAX (603) 471-0471

Extension Listing


2018 Updated Tax Info TAB


Tax Cuts and Jobs Act - Individuals

Pre-Reform 2018 Post-Reform 2018

Top Individual Tax Rate 39.6% 37% (until 2025) - see pg. 13

Estate Tax Exemption $5.59 Million $11.18 Million (until 2025)

State and Local Tax

(SALT)

Deductible Capped at $10,000 property

and income tax

Mortgage Interest

Deduction

Deductible up to $1 Million +

$100,000 home equity

Deductible up to $750,000 of

new mortgages; no home

equity

Medical Expense

Deduction

Floor of 10% of AGI Floor reduced to 7.5% AGI for

tax years 2017 & 2018

Miscellaneous Deduction

(i.e. invest. advisory fees)

Floor of 2% AGI Eliminated

Personal Exemption $4,150 per person Eliminated

Standard Deduction $6,500 single; $13,000 joint $12,000 single; $24,000 joint

Child Tax Credit $1,000 per child $2,000 per child; refundable

up to $1,400

ACA Individual Mandate Penalty of $695 or 2.5% for no

health insurance

Eliminates Penalty

Individual AMT $55,400 single; $86,200 joint

exemption; $164,000 phase-out

$70,300 single; $109,000 joint

exemption; phaseout of $1M

Section 529 Plans Qualified higher education ex-

penses only

K-12 education expenses now

approved up to $10,000/yr per

Student Loan Interest

Deduction

Deductible No Change

First-In, First-Out (FIFO) Flexibility to optimize No Change

Capital Gain Long-Term: 0%/15%/20%

Short-Term: Ordinary Income

No Change

Municipal Interest

Exemption

Muni interest exempt from

federal income tax

No Change

The 2017 Tax Cuts and Jobs Act was officially signed into law on December 22,

2017. This is the most sweeping federal tax legislation in more than three dec-

ades, and it affects both individual taxpayers and businesses.


Pre-Reform 2018 Post-Reform 2018

Corporate Tax Rate 35% 21% (permanent)

Top Pass-Through Rate 39.6% 20% deduction (until 2025) -

N/A to Prof Service Corp

Corporate AMT 20% tax to broadly defined

alternative income

Repealed

Expensing 50% expensing through 2020 100% expensing through

2023

Interest Expense

Deductibility

No Limit Limits to 30% EBITDA until

2021; 30% EBIT thereafter

Net Operating Loss Carry-back 2yrs; Carry-

forward up to 20yrs

Eliminates carry-backs; indef-

inite carry-forwards (caveats)

Taxation of Foreign

Income

Worldwide (repatriated only) Territorial; 100% exemption

Deemed One-Time

Repatriation Tax

Not Applicable 15.5%; 8% illiquid

Tax Cuts and Jobs Act - Businesses

Other Important Changes/Implications:

Charitable Contributions - Donations of cash to public charities will be deductible

up to 60% of AGI, an increase from the current 50%. Implications of this for char-

itable trusts and donor advised funds as more may be deducted

Alimony Payments - The deduction for alimony paid to an ex-spouse will be disal-

lowed, and the income will no longer be taxed to the recipient. This only applies

to divorces entered into after 2018.

Recharacterization of Roth Conversion - The ability to recharacterize a Roth con-

version is eliminated. This is retroactive, so while normally taxpayers have until

October 15th of the year following the conversion to request a “do over”, those

who converted back in 2017 no longer have this option.

ABLE Accounts - Annual contributions to these tax-deferred accounts for those

with disabilities are currently capped at the annual gift tax exclusion amount

($15,000 in 2018). Beneficiaries are now allowed to contribute their own earnings

once the limit has been reached by gifts from others.


Employee Benefit Limits

Defined Benefit Plans $220,000

Defined Contributions $55,000 or 100% of pay

Elective Deferral Limit for

401(k) (incl. Roth) and 403(b) plans $18,500

Catch-up for 401(k) and 403(b) plans $ 6,000

SIMPLE IRAs and SIMPLE 401(k) plans $12,500

Catch-up for SIMPLE IRAs and

SIMPLE 401(k) plans $ 3,000

Elective Deferral for 457 Plans $18,500

Catch up for 457 Plans: $ 6,000

SEP Contributions: 25% of Covered Comp up to

maximum of $55,000

Minimum Compensation for SEPs $ 600

Maximum Compensations for SEPs,

VEBAs, TSAs, Qualified Plans $275,000

Highly Compensated Employee Comp $120,000

Key Employee Compensation $175,000


Contributions Limits—Traditional & Roth IRA

*Taxpayers age 50 and over are eligible to make catch-up contributions

AGI Phase-Out Range for Contributions to Roth IRAs

Married Filing Jointly $189,000—$199,000

Single $120,000—$135,000

Traditional IRA Deductibility Rules

Covered by an employer sponsored plan, phase-out for deduction is

Married Filing Jointly $101,000—$121,000

Single $63,000—$73,000

Not covered by an employer sponsored plan, but filing a joint return with a

spouse who is covered by one, phase-out for deduction is $189,000—$199,000

Single individuals not covered by a qualified plan and married couples where

neither is participating in a qualified plan, deduction of up to the lesser of $5,500

(plus Catch Up) or 100% of earned income allowed without regard to AGI

Kiddie Tax

Changed as part of the Tax Cuts and Jobs Act, any earned income for a child

will be taxed using the trust tax rates (see pg. 13). These revised kiddie tax

rules are set to expire after 2025.

2017 2018

Regular $5,500 $5,500

Catch-Up* $1,000 $1,000

Social Security/Medicare Taxes

OASDI Wage Base: $128,400

OASDI Tax: 6.2%

Medicare Wage Base: Unlimited

Medicare Tax: 1.45%

Additional Medicare Tax .90%

Single $200,000+, Married $250,000+


2018 TAX YEAR INFORMATION

Federal Income Taxes

Married Filing Jointly & Surviving Spouse

Single Individuals

STANDARD DEDUCTION Joint $24,000 Single $12,000

Trust & Estates Income Tax Rates

Ordinary Taxable Income Income Tax Rate Capital Gains Rate

$0 - $2,550 10% 0%

$2,551 - $9,150 24% 15%

$9,151 - $12,500 35% 15%

$12,501+ 37% 20%

Taxable Income Tax on Column 1I Tax on Excess Gross Income* Capital Gains

$0 $0 10% $24,000 0%

$19,050 1,905.00 12% $43,050 0%

$77,400 8,907.00 22% $101,400 10%

$165,000 28,179.00 24% $189,000 15%

$315,000 64,179.00 32% $339,000 15%

$400,000 91,379.00 35% $424,000 18.8%**

$600,000 161,379.00 37% $624,000 23.8%**

Taxable Income Tax on Column 1I Tax on Excess Gross Income* Capital Gains

$0 $0 10% $12,000 0%

$9,525 $952.50 12% $21,525 0%

$38,700 $4,453.50 22% $50,700 0%

$82,500 $14,089.50 24% $94,500 15%

$157,500 $32,089.50 32% $169,500 15%

$200,000 $45,689.50 35% $212,000 18.8%**

$500,000 $150,689.50 37% $512,000 23.8%**

*Gross Income prior to standard deduction(s).

**Includes additional Medicare tax on Net Investment Income above $250,000 (MFJ)/$200,000 (Single). See page 17.


2018 Estate & Gift Tax Table

(also found in Estate & Charitable Section - pg. 63)

Taxable Gift Taxable Gift Tax on Rate on

From To Col. 1 Excess

$ 0 $ 10,000 $ 0 18%

10,000 20,000 1,800 20%

20,000 40,000 3,800 22%

40,000 60,000 8,200 24%

60,000 80,000 13,000 26%

80,000 100,000 18,200 28%

100,000 150,000 23,800 30%

150,000 250,000 38,800 32%

250,000 500,000 70,800 34%

500,000 750,000 155,800 37%

750,000 1,000,000 248,300 39%

1,000,000 11,180,000 345,800 40%

11,180,000 —— 4,417,800 40%

Estate & Gift Tax Exclusion Amount

Year Exclusion Amount Tax Credit

2018 11,180,000 $4,417,800

Portability between spouses is now permanent. (“DSUE” = Deceased

Spousal Unused Exclusion).

Basis is stepped up at death.

Why consider Marital or CST trusts?

DSUEA amount is NOT indexed after the first death.

CST will shelter future appreciation.

Marital trust can irrevocably name beneficiaries.

Trust assets are generally sheltered from creditors and are kept

private.


2018 Gift Tax Credit

Exclusion Equivalent

$11,180,000

Annual Exclusion for Gifts

$15,000 per donee

Annual Exclusion for Gifts to Non-Citizen Spouse

$152,000

Social Security Benefits

Maximum SSI Benefit: $2,788/month

Earnings Limits for under Full Retirement

Age -Lose $1 for every $2 earned over: $17,040/year

Over age Full Retirement Age: No Limit

Taxation of Social Security Benefits

Married Filing Jointly Single

0% Taxable Up to $32,000 MAGI* Up to $25,000 MAGI*

50% Taxable $32,001—$44,000 MAGI* $25,001—$34,000 MAGI*

85% Taxable Above $44,000 MAGI* Above $34,000 MAGI*

*MAGI equals Adjusted Gross Income plus any tax exempt interest earned and 1/2 of

Social Security Benefit

Social Security Exempt Pension Offset

Personal Social

Security

Collecting Spouse

Benefit

Collecting Surviving

Spouse Benefit

Person

Receiving

Exempt

Pension

Approximately

50% reduction

in SSI

67% of exempt

pension subtracted

from SSI eligibility

67% of exempt pen-

sion subtracted from

SSI eligibility


Type of

Taxpayer Deduction of Premiums

Taxation of

Benefits

Individual tax-

payer who does

NOT itemize

deductions

No LTC insurance premium deduction available

Reimburse-

ment: benefits

are not included in

income.

Individual tax-

payer who item-

izes deductions

LTC insurance treated as accident and health insurance Deduction is limited to the lesser of actual premium paid or

eligible LTC premium amounts Eligible LTC premium in 2018: Attainted age Limit 40 or less $ 420 41-50 $ 780 51-60 $1,560 61-70 $4.160 71 and older $5,200 Medical expense deduction is allowable to extent that such ex-

penses (including payment of eligible LTC premium) exceed 10%

of AGI.

Per diem

(indemnity):

benefits are not

included in income

except those

amounts which

exceed the greater

of: - Total qualified

LTC expenses - $360/day

MSA & HSA Eligible LTC insurance premium is considered a qualified medical

expense

Employee (non-owner)

LTC premium paid by employee: - Deductible be employee who itemizes (subject to limitations

above) - May NOT be paid through a cafeteria plan - May NOT be paid through an FSA or similar

arrangement LTC premium paid by employer:

- Employer-provided LTC insurance is treated as an accident and

health plan - Deductible by employer (subject to reasonable compensation) - Total (not eligible) LTC insurance premium is excluded from

employee’s income

Non-forfeiture:

benefits (return of

premium) are: - Available only

upon total surren-

der or death - May not be

borrowed or

pledged - Included in gross

income to extent

of any deduction

of exclusion al-

lowed with re-

spect to premium

C-Corporation

(shareholder/ employee w/ W-2)

Treated as “Employee” (see above)

Sole

Proprietor S-Corporation

(greater than 2%

shareholder

with W-2) Partnership (any %)

Eligible for Self-Employed health insurance deduction,

which is taken “above the line” Line 29 of IRS Form 1040 Limited to lesser of actual LTC premium paid or eligible

LTC premium (see “Individual who itemizes” section)

Deduction is NOT limited to 10% AGI threshold. Limited

Liability Cor-

poration

(LLC)

Tax-Qualified Long-Term Care Insurance Summary


Medicare Tax on Net Investment Income

The tax is 3.8% on the lesser of Net Investment Income or NII LESS the threshold

amount. See the following table for an illustration:

The following should be considered as planning techniques to potentially reduce the im-

pact of this tax:

Targeting investments with losses will directly offset NII.

Reducing AGI will also reduce the tax, if doing so would reduce income below the threshold amount.

Deductible contributions to IRAs and deferrals to 401(k) plans should be considered.

Giving appreciated securities to charity as any gains would not be included on the tax return.

If a Sub Chapter S-Corp or rental property, changing income received from passive to active would not subject such income

to the tax. Note: Doing so will subject income to FICA.

Net Investment Income

Filing Status Married Filing Jointly Single

Threshold $250,000 $200,000

Example:

Wages $225,000 $300,000 $175,000 $250,000

Net Investment Income $75,000 $75,000 $60,000 $60,000

Total $300,000 $375,000 $235,000 $310,000

Amount Over Threshold $50,000 $125,000 $35,000 $110,000

Lesser of NII or Amount Over $50,000 $75,000 $35,000 $60,000

Tax at 3.8% $1,900 $2,850 $1,330 $2,280

Tax-Free Policy Exchanges under IRS Code Section 1035

Life insurance policies and annuities must have the same owner and insured (cannot

go from single life policy to joint life policy).

Policy funds should transfer directly between insurance companies.

If cash or property is included as part of the exchange, any gain will be recognized up to that amount.

If a tax free withdrawal is taken from a life policy which is subsequently exchanged for a new life policy it may be considered a “step” transaction with gain recognized

to the extent of the withdrawal.

Cost basis should carry over from the old policy to the new .

Type of New Policy/Contract

Existing Policy/Contract

Type

To Life

Insurance

To an Endow-

ment Contract

To a Fixed or

Variable Annuity

To a Qualified

LTC Contract

Life Insurance Yes Yes Yes Yes

Endowment Contract No Yes1 Yes Yes

Annuity Contract No No Yes Yes

Qualified LTC Contract No No No Yes


NOTES


Government Benefits TAB


When to Take Social Security Retirement Benefits Social Security is administered by the Social Security Administration and provides

old age (retirement), survivors, and disability benefits (OASDI). The most widely

used aspect of this program is the retirement benefits – nine out of ten individuals

over age 65 receive benefits. Research by the Federal government indicates that

Social Security retirement benefits typically make up more than one-third of the

income of Americans age 65 or older.1 Thus, the decision as to when to begin to

take Social Security retirement benefits is an important one.

The question is made a little easier to answer if you separate when you want to

retire from when you want to begin receiving Social Security retirement benefits;

these two events don’t necessarily have to occur at the same time. An under-

standing of how your benefits are calculated and what happens if you continue to

work after beginning to receive benefits, is also important.

“Full” Retirement Age – “Full” Benefits

Full Retirement Age (FRA), the age at which “full” benefits – 100% of an individual’s

Primary Insurance Amount2 (PIA) – are available, is set at age 65 for those born in

1937 or earlier. For those born 1938 or later, FRA gradually increases until it

reaches age 67 for those born in 1960 or later.

Early Retirement – Reduced Benefits

If fully insured, an individual can claim permanently reduced retirement benefit as

early as the first full month of age 62. The amount of the reduction varies with the

year of birth. For example, an individual born in 1943 (FRA = 66) who began re-

ceiving benefits at age 62 had his or her retirement benefit reduced to 75% of what

it would have been had they chosen to wait until FRA. However, for a worker

born in 1962, for whom FRA is age 67, choosing to receive retirement benefits at

age 62 results in an initial benefit reduced to 70% of what it would have been had

the individual waited to NRA.

Delay Retirement – A Bigger Benefit

For those continuing to work past their FRA or those with adequate retirement

income outside of Social Security, delaying receipt of retirement benefits may be

appropriate. What happens when you decide to wait and take your retirement

benefits later than your FRA is you get paid for waiting, in the form of a larger

retirement benefit. For each year beyond your FRA that you delay receiving bene-

fits – up to age 70 – your benefit is increased by 8%.

Due to new rules, a spouse or dependent of a worker born after 4/30/1950

may only receive a benefit based on the worker’s benefit if the worker has

filed and is receiving a benefit.


Phase-In (Restricted Application)

One spouse starts receiving income before their Full Retirement Age while the

other spouse starts receiving their benefit at their FRA. Only available to those

born 1/1/1954 or earlier.

Example of Phase-In: This strategy provided benefits as early as 62, with the ability

to receive higher benefits later in life. At age 62, the lower-earning spouse collects

his/her individual benefit, which is reduced based on their date of birth and FRA. At

FRA the higher-earning spouse collects the spousal benefit only( filing a restricted

application) in order to delay his/her own benefit until age 70. At age 70, the higher

-earning spouse collects his/her own benefit and the lower-earning spouse receives

the spousal benefit.

When Is Best to Receive Retirement Benefits?

One way to answer this question is to perform a break-even analysis which esti-

mates the age at which the total value of higher benefits (from delaying retirement)

is greater than the total value of lower benefits (from starting retirement early).

Those expecting to live longer than the break-even age would likely benefit from

delaying the start of Social Security retirement benefits. For those in poor health,

or if family members have historically had short life spans, it is likely of greater

benefit to begin benefits early.

AdvisorExchange: There is a Social Security Analysis spreadsheet available on

AE for your use. It will compare up to 3 ages at which to begin benefits and based

on the life expectancy assumption will provide guidance on what age would pro-

vide the highest net present value (NPV). This can be found under The Planning

Center: Planning.


The Effect of Early or Delayed Retirement on Social Security

Retirement Benefits

The table below shows the effect of early or delayed retirement on an individu-

al’s retirement benefit, depending on their year of birth.

Source: Social Security Administration. 1The PIA is calculated by the Social Security Administration based on a person’s lifetime earnings rec-

ord.

Retirement Benefit as a Percentage of the Primary Insurance Amount

at Various Ages1

Year of

Birth

Full Re-

tirement

Age (FRA)

Credit for

each year

of delayed

retire-

ment

after FRA

(Percent)

Benefit as a % of PIA at Age

62 63 64 65 66 67 70

1943-

1954 66 8 75 80 86 2/3 93 1/3 100 108 132

1955 66, 2mos 8 74 1/6 79 1/6 85 5/9 92 2/9 98 8/9 106 2/3 130 2/3

1956 66, 4mos 8 73 1/3 78 1/3 84 4/9 91 1/9 97 7/9 105 1/3 129 1/3

1957 66, 6mos 8 72 ½ 77 ½ 83 1/3 90 96 2/3 104 128

1958 66, 8mos 8 71 2/3 76 2/3 82 2/9 88 8/9 95 5/9 102 2/3 126 2/3

1959 66, 10mos 8 70 5/6 75 5/6 81 1/9 87 7/9 94 4/9 101 1/3 125 1/3

1960 and

later 67 8 70 75 80 86 2/3 93 1/3 100 124


How Work Affects Social Security Benefits

If a Social Security recipient also works while receiving retirement benefits, some

of the benefits may be reduced if the income earned exceeds certain dollar limits.

However, the month an individual reaches Full Retirement Age, or FRA, Social

Security benefits are no longer reduced, regardless of the amount of income

earned.

Example (1): An individual begins receiving Social Security benefits at age 63 in

January 2018 with a benefit of $500/month. If the retiree works and earns

$27,040 during the year, he or she would have to give up $5,000 of Social Security

benefits ($1 for every $2 over the $17,040 limit), but would still receive $1,000.

Example (2): Assume an individual reaches FRA in August 2018. Also assume the

individual has an annual salary of $60,000 for 2018. Even though the salary is

greater than the earnings limit, only the first 7 months (the month in which the

individual reaches FRA is not counted) or $35,000 are counted as earnings to test

for possible reduction. Since this amount is less than the limit, there will be no

reduction in benefits should she choose to begin receiving benefits early.

Age of Social

Security Benefits

Recipient

Annual Exempt Amount One Dollar of Benefits Lost for

Every Two or Three Dollars

Earned Over the Exempt

Amount 2017 2018

Under FRA $16,920 $17,040 Every Two Dollars

Year FRA

Reached $44,880 $45,360 Every Three Dollars

Month FRA

Reached No Limit No Limit No Loss of Benefits


What Counts as Earnings? Any wages earned from work as an employee and any net earnings from self-

employment count as earnings. Wages include bonuses, commissions, fees and

earning from all types of work, whether or not covered by Social Security.

Income not counted as earnings include:

Investment income including stock dividends, interest from savings accounts, income from annuities, limited partnership income and rental income from

real estate you own (unless counted as self-employment income).

Payments from IRAs or Keogh Plans.

Income from Social Security, pension, other retirement pay and Veterans Administration Benefits.

Gifts or inheritances.

Royalties received after age 65 from patents or copyrights obtained before that year.

Retirement payments received by a retired partner from a partnership, pro-vided certain conditions are met.

Income from self-employment received in a year after the year a person be-comes entitled to benefits. This refers to income which is not attributable to

services performed after the month of entitlement. This is only excluded

from gross income for the purposes of the earning test.

Social Security Information

SSA Reinstates Mailing of Paper Statements

In September 2014, the Social Security Administration resumed mailing paper

statements to those not enrolled in their online system. Statements will be mailed

in five year increments, beginning at 25 and continuing to 60. As before, it is possi-

ble to get an online estimate of your personal benefits (or direct your clients on

how to do so). In order to use the online estimator you will need: your social se-

curity number, mother’s maiden name, date of birth, state of birth and earnings for

the prior calendar year. Following is a link to the estimator: http://www.ssa.gov/

estimator/

Withdrawal of Social Security Application

An individual can start collecting benefits and then change his or her mind by filing

a “Request for Withdrawal of Application” form with the SSA. They will review

the request and, if it is granted, repayment of all of the payments received is re-

quired. There is no penalty or interest on the amount repaid. The SSA recently

restricted withdrawals to within 12 months of collecting benefits and will only al-

low one withdrawal per lifetime. The individual can then file for benefits at a later

date.

http://www.ssa.gov/estimator/http://www.ssa.gov/estimator/


Social Security Retirement Benefits

This table shows approximate monthly benefits at Full Retirement Age (FRA) for a

worker and spouse. It assumes that the worker has worked since age 22, is the

higher earner, and received annual wage increases. Values are shown in today’s

dollars. The spouse may qualify for higher retirement benefits based on his/her

own work record

Monthly Benefits at Full Retirement Age

Present Annual Earnings

Age in

2018

Who Receives

Benefits

$45,000 $65,000 $85,000 $128,400+

66 Worker 1,547 2,016 2,296 2,788

Spouse 773 1,008 1,148 1,349

65 Worker 1,544 2,012 2,289 2,783

Spouse 772 1,006 1,144 1,391

64 Worker 1,597 2,082 2,369 2,881

Spouse 798 1,041 1,184 1,440

63 Worker 1,645 2,144 2,442 2,970

Spouse 822 1,072 1,221 1,485

55 Worker 1,655 2,160 2,442 2,982

Spouse 827 1,080 1,221 1,491

50 Worker 1,669 2,180 2,455 3,000

Spouse 834 1,090 1,227 1,500

45 Worker 1,683 2,201 2,467 3,015

Spouse 841 1,100 1,233 1,507

40 Worker 1,697 2,221 2,480 3,029

Spouse 848 1,110 1,240 1,514


Social Security Survivor Benefits

This table shows approximate monthly survivor benefits payable to a family in

2018. Figures assume work from age 22 on. Survivor benefits are based on the

insured worker’s Primary Insurance Amount (PIA) on the date of death.

Monthly Survivor Benefits in 2018

Present Annual Earnings

Age in

2018

Who Receives

Benefits

$45,000 $65,000 $85,000 $128,400+

66 Spouse at FRA* 1,547 2,016 2,296 2,788

Spouse at 60 1,106 1,441 1,641 1,994

Child or Spouse

caring for child


Medicare

Medicare is a federal government program providing health insurance benefits to

qualifying individuals age 65 or older as well as certain disabled individuals under

age 65. The two most widely recognized Medicare programs are Part A, hospi-

tal insurance and Part B, medical insurance. Similar to traditional medical insur-

ance Part A and Part B represent “fee for service” coverage. A Medicare benefi-

ciary can go to any physician or health facility nationwide which accepts Medi-

care payments.

Premiums for Medicare Parts A and B are generally paid directly from Social

Security benefits although the Center for Medicare and Medicaid Services (CMS)

will bill the beneficiary directly if he or she is not yet receiving Social Security

benefits. Most Medicare beneficiaries do not pay a premium for Part A. Medi-

care Part B premium is based on the beneficiary’s modified adjusted gross in-

come as seen in the table below.

In a year where there is no COLA increase to Social Security benefits, those in

the $85,000 or less (single)/$170,000 or less (joint) MAGI brackets as part of the

“hold harmless” provision. This means that their Social Security benefit checks

will not decrease due to Medicare Part B premium increases. Those who are in

the higher MAGI ranges and those newly enrolling in Part B are not “held harm-

less” and in most circumstances must bear the entire brunt of the increase in

premiums, until Social Security COLA’s even out the distribution of Medicare

cost increases.

Late enrollment penalty: Individuals who don't sign up for Part B when they

are first eligible or drop Part B and then get it later, may have to pay a late

enrollment penalty for as long as they have Medicare. The monthly premium for

Part B may go up 10% for each full 12-month period that the individual could

have had Part B, but didn't sign up for it.

Modified AGI - 2016 Medicare Part B Premium

Single Married Filing Joint 2018 ($3/mo surcharge)

$85,000 or less $170,000 or less $134.00

$85,001 - $107,000 $170,001 - $214,000 $187.50

$107,001 - $133,500 $214,001 - $267,000 $267.90

$133,501 - $160,000 $267,001 - $320,000 $348.30

$160,001 & above $320,001 & above $428.60


Services NOT Covered by Medicare – Many individuals are surprised to

learn that Medicare does not cover most routine dental or eye care. Following

is a list of some of the things NOT covered by Medicare. For a more complete

list refer to the Center for Medicare & Medicaid Services web site

(www.cms.gov)

Most Chiropractic services

Cosmetic Surgery (except after an accident)

Custodial Care

Most Dental Care

Eyeglasses and eye examinations related to eyeglasses

Routine Foot Care

Supportive devices for the feet

Hearing aids and hearing examinations for prescribing, fitting or changing

hearing aids

Orthopedic shoes

Medicare Supplemental Insurance (Medigap Policies) – Private insurers

offer Medigap policies designed to help pay deductibles or coinsurance incurred

by Medicare beneficiaries covered by traditional Medicare Parts A and B.

Medigap policies must meet federal standards and provide access to a “core

package” of benefits. The standardized policies are identified as A, B, C, D, F, G,

K, L, M and N. Individuals are advised to seek the assistance of a qualified Medi-

care Supplemental Insurance specialist to determine which plan best fits their

situation.

Medicare Part C – Medicare Advantage Plans

Unlike Medicare Part A and B which are “fee-for-service” plans, Medicare Part C

Advantage plans are designed to provide Medicare recipients a range of private

health plan choices, on a cost effective basis, as an alternative to Medicare Parts

A and B. Medicare Advantage plans are required to offer the same benefits as

Parts A and B except for hospice care. Medicare Advantage options include:

Health maintenance organizations (HMOs)

Point-of-service (POS) plans

Preferred provider organizations (PPOs)

Provider sponsored organizations (PSOs)

Private fee-for-service plans

http://www.cms.gov


Medicare Part D – Prescription Drug Coverage

Medicare Part D, the Prescription Drug Insurance program was added to Medicare

in 2003. It is voluntary program of health insurance covering a portion of prescrip-

tion drug costs not generally covered by other Medicare programs. Although Part

D is a voluntary program individuals who wish to participate must enroll as soon as

eligible either through age (65) or loss of prior coverage. There is a penalty for

individuals who delay enrolling in a Medicare prescription drug plan beyond the

initial eligibility period. Prescription Drug Insurance is offered through private

health insurance plans. Participants with traditional Medicare can add Part D Pre-

scription Drug Insurance or choose a Medicare Advantage plan with comprehen-

sive benefits including drug coverage. Participants can change plans each year

during the traditional Medicare Open Enrollment period from October 15 to De-

cember 7th.

Plans can vary widely between the medications covered and out-of-pocket costs

for each medication. Not all pharmacies are contracted with all plans. It is im-

portant to review the individual’s medication requirements against those covered

by the plans as well as the monthly premium, yearly deductible and co-payment

requirements before deciding on a plan.

2018 Medicare Prescription Drug Insurance Standard Coverage

Medicare Part D is financed partially through premiums paid by participants. Enrol-

lees whose incomes exceed the same thresholds that are applied to higher-income

Part B enrollees pay a monthly adjustment amount. Individuals falling with these

income thresholds pay the regular plan premium to the Prescription Drug Insur-

ance carrier and the monthly adjustment amount to Medicare.

$405

Deductible

$406 - $3,750

$3,751 Until Out

of Pocket Totals

$5,000

Above

$5,000 Out

of Pocket

Costs

Individual Pays $405.00 35% up to

$1,172.50 $3,427.50

Small Co-

Insurance

Plan Pays -0- 65% up to

$2,177.50 -0- Remaining

Total Drug

Expense $400 $3,750 $7,177.50

Unmarried Individuals

Married Filing Jointly

Married Filing

Separately

Monthly Adjust.

Amount

$85,000 or less $170,000 or less $85,000 or less $0.00

$85,001 - $107,000 $170,001 - $214,000 $13,00

$107,001 - $133,500 $214,001 - $267,000 $33.60

$133,501 - $160,000 $267,001 - $320,000 $54.20

$160,001 & above $320,001 & above $85,001 & above $74.80


Medicaid

Medicaid & Elder Long Term Care

Medicaid is a state and federally funded welfare program designed to provide

health care for individuals who meet certain income/asset criteria or who are

receiving federal income maintenance payments such as Supplemental Security

Income (SSI) or Aid to Families with Dependent Children (AFDC).

Medical services provided include hospital (inpatient and outpatient), physicians’

services, medical and surgical dental services, prenatal and delivery service, post-

partum care, health care screening including diagnostic and treatment for chil-

dren. Medicaid also provides for payment of Medicare premiums for needy

elderly or disabled individuals along with home health care services and long

term care for qualifying elderly individuals.

Long Term Care Services for the Elderly

Medicare and Medigap policies do NOT pay for custodial long term care either

at home or in a nursing facility. Nursing home or assisted living care must be

paid for either by the individual receiving the care, private Long Term Care In-

surance or, if the individual qualifies, by Medicaid. Medicaid eligibility is deter-

mined by measuring the “countable assets” owned by an individual or couple.

Countable assets include any bank accounts, CDs, investments, retirement plans,

real estate (other than primary residence or income producing), Cash Value in

life insurance.

Non-countable assets include the primary residence (up to a maximum amount

of $572,000* to $858,000* based on the state), tangible personal property, one

vehicle.

An individual can retain $2,500 of countable assets (can vary by state). For 2018

the maximum Community Spousal Resource Allowance (CSRA) is $123,600*.

This amount is used by each state to determine Medicaid eligibility for a couple.

There are two methods that states can use to calculate eligibility based on this

number.

Some states apply 100% of the couple’s countable assets toward the $123,600

maximum. In those states a couple with $100,000 of countable assets could

keep the full $100,000 and still qualify for Medicaid. In these states the minimum

CSRA never comes into consideration since the couple keeps 100% of their

countable assets up to the maximum.

Other states apply 50% of the couple’s countable assets toward the $123,600

maximum. In those states a couple with $100,000 of countable assets could

retain only $50,000 the balance would be required to be spent down to meet

the Medicaid qualification. In the 50% states the couple would need $247,200 in

total countable assets in order to retain the full $123,600. For states applying

this method the minimum CSRA of $27,980 is used if 50% of the countable as-

sets equals less than the minimum, the couple can retain 100% of the assets up

to the $27,980.


Any amount determined to be in excess of the CSRA must be “spent down” to

the maximum CSRA value before the Medicaid applicant will be eligible to re-

ceive Medicaid benefits. Acceptable use for the excess funds includes, pre-paid

funeral expenses, burial plot, repairs to the residence, purchase of a car to re-

place an existing vehicle.

An immediate annuity can be used to provide income to the community spouse

as long as certain conditions are met. The annuity must be:

Irrevocable and Non-Commutable

Non Assignable

Actuarially sound (not exceeding the beneficiary’s life expectancy, providing equal payments over the term with full recovery of the initial premium paid)

In addition annuity payments cannot be deferred and the state must be named as

the remainder income beneficiary up to the amounts paid by Medicaid for the

beneficiary’s or applicant’s care.

Along with measuring an applicant’s assets the Medicaid applicant’s income must

be less than the Medicaid reimbursement rate for the specific facility where the

applicant resides. Reimbursement rates vary from one facility to another but

they are generally in excess of $4,000/month. Only income received by the

applicant is applied toward this test. Any spousal income is ignored for this pur-

pose.

Transferring Assets

Laws have been enacted on both the federal and state level to limit an individu-

al’s ability to transfer assets to another person in order to qualify for Medicaid.

Assets transferred to an individual (other than the spouse) may result in a

“disqualification period” for the Medicaid applicant.

When applying for Medicaid the applicant is asked to disclose any gifts made

within the prior 60 months. The value of any gifts made during that period is

divided by the average monthly cost of nursing home in the state of application

to determine the “disqualification period”.

For example assume an individual made a gift of $50,000 36 months before ap-

plying for Medicaid and the average cost for nursing home care in the state is

$8,000. The disqualification period would be 6.25 months: $50,000/$8,000 =

6.25.

The 6.25 month disqualification period starts when the individual applies for

Medicaid. The applicant would not receive Medicaid until the 6.25 month dis-

qualification period has passed.

Not all transfers of assets are subject to these rules. As noted above a transfer

between spouses would not trigger a disqualification period and there are special

rules relating to the transfer of a home.


Long Term Care Partnership

In 45 states (currently) the state government has partnered with private health

insurers to offer residents LTC policies designed to integrate with Medicaid. A

“Partnership LTC Policy” provides the insured with some asset protection once

the policy’s LTC benefits are exhausted for the insured’s long term care needs.

Estate Recovery

At the death of a Medicaid recipient the state government is required to attempt

to recover the Medicaid funds paid for the recipient’s care. There are very spe-

cific limits on the monies from which the state can require this reimbursement.

State laws vary however in general:

Recovery attempts cannot take place during the lifetime of the Medicaid recipient’s spouse.

Reimbursement is only allowed against the estate of the Medicaid recipient.

The state’s ability to place a lien against the home are restricted depending on whether or not a spouse or a dependent or disabled child is living there.

Medicaid laws vary by state and changes can be frequent, it is important to con-

sult a legal professional with experience in the field for assistance in this area.

*Source: Medicaid.gov

AdvisorExchange: There is an LTC Cost Estimator spreadsheet available on AE

for your use. It will illustrate the estimated cost of various types of care in northern

New England and the annual savings needed to self-insure this need if insurance is

not an option. This can be found under The Planning Center: Planning.

2018 Maine New Hampshire Massachusetts Vermont Countable Resources

per Applicant1 $2,000 $2,500 $2,000 $2,000

Spousal Resource

Allowance2

100% of

resources

up to

$123,600

$27,980 or one-

half of the assets

up to $123,600

100% of re-

sources up to

$123,600

100% of

resources

up to

$123,600

Avg. Nursing Home

Cost per Month3 $9,140 $9,657 $11,710 $8,760

1Countable Assets do not include: Principal residence, tangible personal property, one vehicle, real property (jointly-owned & income producing), life insurance with no cash value, contractual Keogh plans, farm machinery, livestock, etc.

2 Information taken from www.elderlawanswers.com

3 Based on Semi-Private Room. Data from Genworth Cost of Care (https://www.genworth.com/about-us/industry-

expertise/cost-of-care.html)


NOTES


IRAs, 401(k)s & Benefits TAB


Retirement Plan Rollover Chart References:


Required Minimum Distributions – Traditional IRAs

and Qualified Retirement Plans

Individuals who own a traditional IRA (including SEP or SIMPLE) are required to

take annual distributions from the IRA upon attaining age 70 ½. Participants in an

employer sponsored retirement plan are also subject to required minimum distri-

bution rules, although the starting age may be different. In determining when distri-

butions must start and the amount of the distribution it’s important to know the

following:

Required Beginning Date – The date by which the account owner must start taking required minimum distributions.

Required Minimum Distribution (RMD) – The required withdrawal amount from the traditional IRA or qualified employer sponsored plan. This develops

the minimum withdrawal amount the IRA owner is always free to take more.

Required Beginning Date:

Traditional IRAs* (SEP IRAs or SIMPLE IRAs) – Not later than April 1st of the year following the year the traditional IRA owner turns 70 ½.

Qualified Plans including 403(b), 401(k), SIMPLE 401(k), pension and profit sharing plans– Not later than April 1st of the year following the later

of (a) the plan participant reaches age 70 ½ or (b) the participant retires. If

the participant owns 5% or more of the company sponsoring the qualified plan

then distributions must start not later than April 1st of the year following the

year he or she reaches age 70 ½.

Initial Distribution Amount:

If the initial distribution is delayed until April 1st of the year following the year the

owner turns 70 ½, the initial distribution is calculated based on the values from the

prior year. In addition, if the initial distribution is delayed until this date, a 2nd distri-

bution must be taken prior to 12/31 of the year in which the initial distribution is

taken. The age factor is based on age at the end of year. of withdrawal.

For example, if the IRA owner turns 70 ½ in November 2017 and does not take a

distribution until April 1, 2018, that distribution is based on the 12/31/2016 account

value(s) for the IRA and the distribution factor for age 70. An additional distribu-

tion must be taken by 12/31/2018 which is calculated based on the 12/31/2017 IRA

value(s) and the factor for age 71.

Calculating the Required Minimum Distributions

The RMD amount is calculated based on:

1. Total account value(s) of all traditional IRAs from December 31st of the prior

year and

2. The age of the account owner (and spouse) at the end of the year

IMPORTANT NOTE: In the case of ancillary benefits, such as a living benefit on an

annuity, only the sponsor company can calculate the RMD.

*Roth IRAs are NOT subject to minimum required distributions during the IRA owner’s lifetime.


The RMD is determined by taking the December 31st account value(s) and dividing the total by a factor based on the age of the IRA owner (and spouse if married).

Factors are determined by the theoretical life expectancy of the IRA owner and his

or her spouse, if married, and are found in one of two IRS tables:

Single owners or those whose spouse is no more than 10 years younger use the factor from the Uniform Lifetime Table

Married owners whose spouse is more than 10 years younger (and the sole

beneficiary of the IRA) use the factor from the Joint and Last Survivor Table.

While the total of all IRA and qualified plan accounts is used in the calculating the

RMD the distribution may be taken from just one IRA or qualified account.

Required Minimum Distributions at Death

If the IRA owner dies after his or her required beginning date for taking RMDs, the

required minimum distribution for the year of death must be taken before the IRA

balance can be transferred for the benefit of the IRA beneficiary.

Penalty Tax

The Penalty Tax for late, missed or miscalculated RMDs is 50% of the amount that

should have been distributed. Based on the size of the penalty and the complexi-

ties of the regulation it is strongly recommended that individuals seek the help of a

professional experienced in this area.

Required Minimum Distributions for Beneficiaries

Generally, if the IRA owner had not begun taking RMDs prior to death, a non-

spouse beneficiary of an IRA has two options for taking required distributions: take

distributions based on their own life expectancy using the Single Life Table found

on page 36 (Life Expectancy Method) or withdraw the IRA balance over 5 years

(Five Year Rule).

RMDs from a beneficiary/inherited IRA must begin by December 31st of the calen-

dar year immediately following the year in which the IRA owner died.

If the beneficiary is the spouse of the owner, he or she has the additional option of

transferring the inherited IRA to an IRA in his or her name so as to avoid having to

take RMDs right away (if the spouse is younger than 70 1/2).

Titling for Beneficiary/Inherited IRA

Many IRA providers title IRAs inherited by a beneficiary as “inherited IRAs”,

“beneficiary IRAs” and “decedent IRAs”. The account should be titled so as to

make clear that it is inherited, the name of the beneficiary, and the name of the

original owner. Below are acceptable examples for Mike Smith (the beneficiary)

and John Smith (the deceased owner):

“Beneficiary IRA FBO Mike Smith B/O John Smith” (LPL uses this format)

“John Smith Decedent IRA FBO Mike Smith”

“Inherited IRA FBO Mike Smith B/O John Smith”


Age Distribu-

tion Period

Distribu-tion % of

12/31 Acct Balance

Age Distribu-

tion Period

Distribu-tion % of

12/31 Acct Balance

70 27.4 3.65% 93 9.6 10.42%

71 26.5 3.77% 94 9.1 10.99%

72 25.6 3.91% 95 8.6 11.63%

73 24.7 4.05% 96 8.1 12.35%

74 23.8 4.20% 97 7.6 13.16%

75 22.9 4.37% 98 7.1 14.08%

76 22.0 4.55% 99 6.7 14.93%

77 21.2 4.72% 100 6.3 15.87%

78 20.3 4.93% 101 5.9 16.95%

79 19.5 5.13% 102 5.5 18.18%

80 18.7 5.35% 103 5.2 19.23%

81 17.9 5.59% 104 4.9 20.41%

82 17.1 5.85% 105 4.5 22.22%

83 16.3 6.13% 106 4.2 23.81%

84 15.5 6.45% 107 3.9 25.64%

85 14.8 6.76% 108 3.7 27.03%

86 14.1 7.09% 109 3.4 29.41%

87 13.4 7.46% 110 3.1 32.26%

88 12.7 7.87% 111 2.9 34.48%

89 12.0 8.33% 112 2.6 38.46%

90 11.4 8.77% 113 2.4 41.67%

91 10.8 9.26% 114 2.1 47.62%

92 10.2 9.80% 115 and over 1.9 52.63%

Uniform Lifetime Table

IRS Reg 1.401(a)(9)-9, Q+A-2


Single Life Table

Age Life Expectancy Age Life Expectancy Age Life Expectancy

0 82.4 38 45.6 76 12.7

1 81.6 39 44.6 77 12.1

2 80.6 40 43.6 78 11.4

3 79.7 41 42.7 79 10.8

4 78.7 42 41.7 80 10.2

5 77.7 43 40.7 81 9.7

6 76.7 44 39.8 82 9.1

7 75.8 45 38.8 83 8.6

8 74.8 46 37.9 84 8.1

9 73.8 47 37.0 85 7.6

10 72.8 48 36.0 86 7.1

11 71.8 49 35.1 87 6.7

12 70.8 50 34.2 88 6.3

13 69.9 51 33.3 89 5.9

14 68.9 52 32.3 90 5.5

15 67.9 53 31.4 91 5.2

16 66.9 54 30.5 92 4.9

17 66.0 55 29.6 93 4.6

18 65.0 56 28.7 94 4.3

19 64.0 57 27.9 95 4.1

20 63.0 58 27.0 96 3.8

21 62.1 59 26.1 97 3.6

22 61.1 60 25.2 98 3.4

23 60.1 61 24.4 99 3.1

24 59.1 62 23.5 100 2.9

25 58.2 63 22.7 101 2.7

26 57.2 64 21.8 102 2.5

27 56.2 65 21.0 103 2.3

28 55.3 66 20.2 104 2.1

29 54.3 67 19.4 105 1.9

30 53.3 68 18.6 106 1.7

31 52.4 69 17.8 107 1.5

32 51.4 70 17.0 108 1.4

33 50.4 71 16.3 109 1.2

34 49.4 72 15.5 110 1.1

35 48.5 73 14.8 111 and over 1.0

36 47.5 74 14.1

37 46.5 75 13.4


Retirement Plan Distributions Before Age 59 ½

Federal law provides significant tax benefits to most employer-sponsored and

individual retirement plans. Contributions to plans such as a 401k and tradition-

al IRA may be tax-deductible and growth inside an account is tax-deferred. The

purpose of these tax breaks is to encourage and reward saving for retirement.

If funds are taken out of a retirement account before the owner reaches age 59

½, however, the distribution is viewed as being ‘early’ and a 10% penalty is ap-

plied to that portion of the distribution. In addition to the withdrawal being

taxed at the owner’s highest marginal tax rate, the 10% penalty that is applied

can make the tax burden painfully high and often a last resort to gain access to

one’s investments.

How Bad is the Tax “Bite”?

Assume that an individual who is in the 24% federal income tax bracket takes a

withdrawal of $10,000 from his 401(k) plan. How much will he pay in taxes on

that distribution?

Initial amount withdrawn: $10,000

Less: Federal Income Tax @ 24% -$ 2,400

Less: 10% Penalty -$ 1,000

= Net After Taxes: $ 6,400

Our hypothetical taxpayer must surrender 35% of the amount initially with-

drawn just to pay federal income taxes. If state or local tax law also taxes such

distributions, the total cost would be even higher.

What Types of Retirement Plans are Subject to the 10% Early With-

drawal Penalty?

Two types of retirement plans are subject to the 10% penalty:

Qualified Plans: Include “qualified” defined contribution retirement plans such as 401(k) plans, 403(b) plans and 403(b) annuity contracts, 403(a) annuity

plans, SIMPLE 401(k) plans, and Profit Sharing and Money Purchase plans.

Distributions from 457 plans are generally not subject to the 10% penalty.

Individual Retirement Plans: Include traditional IRAs, Roth IRAs*, individual retirement annuities, Simplified Employee Pension (SEP) IRAs, and SIMPLE

IRA plans.

* For a withdrawal to be an income tax-free qualified distribution, it must occur after the Roth IRA owner’s 5-year

holding period and satisfy one of the other requirements (e.g. withdrawal taken on or after the owner reaches age 59

1/2 or the owner’s death). The Roth IRA owner’s 5-year holding period begins with the first tax year for which a

regular contribution (or, if earlier, in which a conversion contribution) is made to any Roth IRA of which the taxpayer is

the owner. Each conversion before age 59 1/2 creates its owner 5-year period for purposes of applying the 10% penalty

tax on premature distributions from the Roth IRA.


General Description Applicable

to Quali-

fied Plans?

Applicable

to IRAs?

Separation from service after age 55: Distributions made to

an employee after separating from service after reaching age

55. Yes No

Qualified Domestic Relations Order (QDRO): Distributions

made to an alternate payee, such as in a divorce. Yes No

Death or disability: Distributions made due to the death or

disability of the account owner. Yes Yes

Substantially Equal Periodic Payments (SEPPs): Distributions

that are part of a series of SEPPs made over the life (or life

expectancy) of the taxpayer or made over the joint life (or

joint life expectancies) of the taxpayer and a beneficiary.

Yes Yes

Medical Expenses: Distributions made to pay for deductible

medical expenses. Only the portion that exceeds 7.5% of AGI

is exempt from the 10% penalty. Yes Yes

Higher Education Expenses: Distributions made to pay for

‘qualified higher education expenses’ for the taxpayer, spouse,

child or grandchild. The expenses must be incurred in the

year of distribution and generally include tuition, fees, books,

supplies and equipment for attendance at an eligible education-

al institution.

No Yes

First-time Homebuyer: Distributions of up to $10,000 to buy,

build, or rebuild a first home. A ‘first-time homebuyer’ is

someone who had no ownership in a principal residence in the

two years prior to buying the new home. The funds must be

used within 120 days of receipt.

No Yes

Unused Health Insurance Premiums: Distributions made to

certain unemployed individuals to pay for health insurance

premiums. The individual must have lost a job or generally

must have received unemployment compensation for at least

12 weeks because of the job loss.

No Yes

Qualified Reservist: Distributions made to a military reservist

called to active duty for more than 179 days (or indefinitely)

after September 11, 2001. Such distributions may be repaid

within two years after the end of active duty.

Yes Yes

Transfer to a Health Savings Account (HSA): A once-in-a-

lifetime distribution of amounts in a Traditional or Roth IRA,

in a direct, trustee-to-trustee transfer. The distribution is

limited to the maximum amount for the year that could other-

wise be contributed to the HSA and deducted.

No Yes

IRS Levy on the Account: Distributions made to satisfy an IRS

levy on the account. Yes Yes

Qualified Rollover: Generally a transfer of funds from one

IRA or qualified plan to an eligible recipient IRA or qualified

plan are exempt. Yes Yes

Correct Excess Contributions: Generally, distributions made

to correct excess contributions, either by the account owner,

employer, or both are exempt. Yes Yes

Possible Exceptions to the 10% Penalty Tax


Reas

on for

Dis

trib

ution

Ear

nin

gs

Tax

able

Subje

ct t

o

10%

Penal

ty

Ear

nin

gs

Tax

able

Subje

ct to

10%

Penal

ty

On o

r af

ter

Age

59 1

/2

Yes

No

No

No

Befo

re a

ge 5

9 1

/2 (

Not

subje

ct t

o P

enal

ty E

xce

ptions

liste

d

belo

w)

Yes

Yes

Yes

Yes

1. D

eat

h

Yes

No

No

No

2. D

isab

ility

Y

es

No

No

No

3. F

irst

Tim

e H

om

ebuye

r—$10,0

00 L

imit

Yes

No

Yes

No

4. S

ubst

antial

ly E

qual

Peri

odic

Pay

ments

Y

es

No

Yes

No

5. M

edic

al e

xpense

s ab

ove

7.5

% o

f A

GI

Yes

No

Yes

No

6. In

sura

nce

pre

miu

ms

for

unem

plo

yed

Yes

No

Yes

No

7. H

igher

Educa

tion E

xpense

s Y

es

No

Yes

No

Roth

IR

A E

arnin

gs P

aid O

ut

BEFO

RE 6

Year

s

Roth

IR

A E

arnin

gs P

aid O

ut

AFT

ER

5 Y

ear

s

Dis

trib

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on o

f R

oth

IR

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arn

ings


Backdoor Roth IRA Contribution

Generally, if adjusted gross income (AGI) exceeds the higher end of the phase-

out ranges, one cannot make contributions to a Roth IRA. The removal of in-

come limits for converting a Traditional IRA to a Roth IRA in 2010 brought to

light a new strategy for contributing to a Roth IRA if AGI is above the phase-outs,

called a Backdoor Roth IRA Contribution.

Anyone at any income level can choose to make a non-deductible contribution to

a Traditional IRA up to the annual maximum. Employing the backdoor strategy,

this contribution can subsequently be converted to a Roth IRA, with theoretically

a $0 or near zero tax bill, depending on any capital gain between the time of con-

tribution and the conversion.

Two important considerations:

1. The conversion is subject to IRA aggregation rules, where the taxability is

prorated based on the proportion of total IRA assets that were non-

deductible contributions.

2. Utilizing this on a consistent basis may put the conversion at risk of the IRS

applying the step transaction doctrine, treating the conversion as a Roth IRA

contribution, with appropriate taxes excise tax levied.

Roth Conversion A conversion is a penalty-free taxable transfer of amounts from a traditional IRA

to a Roth IRA. You can convert part or all of the money in your regular IRA to a

Roth IRA. When you convert your traditional IRA to a Roth IRA, you will pay

income tax on the amount converted. Before 2010 a taxpayer was only eligible to

convert a Traditional IRA to a Roth IRA, if he or she had a modified adjusted

gross income (MAGI) that doesn’t exceed $100,000. Additionally, the taxpayer

could not file a married filing separately return. The Tax Increase Prevention and

Reconciliation Act of 2005 (TIPRA) created an opportunity for many taxpayers;

this opportunity is the ability to convert a tax deferred Traditional IRA into a tax-

free Roth IRA starting in 2010 regardless of income. Also, filing status restrictions

are also lifted, allowing married taxpayers filing a separate return to convert a

Traditional IRA to a Roth IRA.

In addition to a Traditional IRA, you may be able to convert the

following into a Roth IRA:

Qualified plan distribution

403(b) plan distribution

Simple IRA

SEP IRA

A change as a part of the Tax Cuts and Jobs Act is that Roth Conversions

are no longer able to be recharacterized. This means that there is no “do

over” after a conversion takes place if the owner changes their mind or

the market performance post-conversion makes it less beneficial. Re-

characterizations of Traditional or Roth contributions are still allowed.


Reasons to Convert to a Roth IRA

With a Roth IRA:

Contributions are allowed at any age

Qualified distributions are tax-free

No Required Minimum Distributions (RMD)

The benefits of a Roth conversion are significant and worth considering, but

may not apply to all investors. Here are a few reasons a Roth conversion may

be right for you.

Looking to diversify your tax exposure? By converting to a Roth IRA, and

paying any conversion tax from other personal assets, you are shifting more of

your assets into tax-favored status.

Was your income too high to participate in a Roth IRA before the

TIPRA changes? Many higher income taxpayers are currently ineligible to

contribute to Roth IRA’s. The TIPRA legislation gives many of these same indi-

viduals access to the unique benefits of a Roth IRA starting in 2010.

Do you think taxes will rise in the future? Many taxpayers believe tax

rates will only go up in the future. Converting to a Roth IRA, will allow you to

pay taxes now, and your withdrawals in retirement would be exempt from

taxes, even if income tax rates were to rise in the future.

Do you want to maximize the wealth transfer to your children? Roth

IRAs may be a more attractive vehicle than a Traditional IRA. Traditional IRAs

require you to take a minimum withdrawal (and pay tax on it) from the IRA

once you reach the age of 70 ½, even if you don’t need the money. Roth IRAs

do not have these required withdrawals, allowing you to keep these savings

invested tax-free and available to pass to your children, although your benefi-

ciaries must take minimum distributions after your death. Your heirs will also

receive tax-free withdrawals from the inherited Roth IRA compared to an

inherited Traditional IRA.

Waiver of 60-Day Rollover Requirement: Self-Certification

Sections 402(c)(3) and 408(d)(3) provide any amount distributed from a quali-

fied plan or IRA will be excluded from income if it is transferred to an eligible

retirement plan no later than the 60th day following the day of receipt. Similar

rules apply to 403(a), 403(b), and 457 eligible governmental plans. Those sec-

tions of the code also provide that the Secretary of the Treasury may waive

the 60-day rollover requirement “where the failure to waive such a require-

ment would be against equity and good conscience, including casualty, disaster,

or other events beyong the reasonable control of the individual subject to

such requirement.

Effective August 4, 2016, Rev. Procedure 2016-47 provides further guidance to

reduce the paperwork involved. A taxpayer may submit a written self-

certification letter to the plan administrator that will satisfy the waiver re-

quirement. It is important to note that if the IRS subsequently audits the tax-

payers return, they may still find that the requirement was not waived depend-

ing on the circumstances.


Roth Conversion Decision Tree Use the Roth Conversion Tree to determine whether or not converting a Traditional

IRA to a Roth IRA is the appropriate strategy.


Trusteed IRA

A Trusteed IRA is a trust account that integrates IRA retirement savings goals with

estate planning objectives. A Trusteed IRA is treated much the same way as any

inherited IRA. One main difference between the two however is how the inherit-

ed IRA assets are handled when the IRA owner dies. With a typical IRA, an own-

er’s beneficiary takes full control of the inherited IRA assets upon the death of the

owner and determines when and how much will be distributed, so long as they

take their Required Minimum Distributions (RMDs). Under a Trusteed IRA, the

terms of the trust dictate the distribution schedule and conditions, and can provide

potential benefits such as:

1. Require beneficiary to stretch IRA withdrawals over their lifetime.

2. Set certain conditions to receive IRA assets (e.g. attaining a certain age,..).

3. Simplified tax reporting through 1099 only, no 1041 or K‐1. 4. Special distributions for disability, education, home purchase, etc.

5. Potential additional creditor protection. Note that this is a state issue, and

some states will not provide creditor protection as they do not consider an

inherited IRA a retirement account.

6. Provide financial support to a surviving spouse while ensuring the remaining

assets pass to children from a prior marriage.

Incentive Stock Options (ISO)

If the stock is immediately sold after the exercise of the option, the Net Value will

be considered ordinary income, and will be taxed accordingly. Therefore, there is

no income tax advantage of exercising one option over another if the stock is to

be immediately sold. The individual will be responsible for the payment of the

taxes, not the employer.

As an ISO, there is an income tax advantage if the grant is held for two years and

the stock is held for a period of at least one year after exercise. In that case, the

subsequent sale of the stock would be subject to capital gains tax treatment, which

is currently taxed at a maximum of 23.8%. Again, however, because the tax treat-

ment is the same for all ISOs, there is no particular advantage to exercising one

option over another. The issue would be the future value of the stock upon ulti-

mate sale. Thus, the greater the difference between the stock option price and the

current price, the greater the leverage for capital gains tax treatment.

Be advised that the difference between the option price and the fair market value is

considered an adjustment to income for AMT purposes, unless stock is sold in the

same year option is exercised. The increase in AMT exemptions beginning 2018

will enhance the benefits of ISO’s going forward.

Non-Qualified Stock Options (NQO)

Upon exercise of Non-Qualified Options, the Employee immediately recognizes

the gain upon exercise as ordinary income. The gain is the difference between the

current market value and the option price. The income is required to be reported

by the Employer and is subject to income tax withholding. This reporting is includ-

ed on the Employee's W-2. Tax treatment on the sale of the stock is normal capi-

tal gain at short-term or long-term rates depending on the holding period.

Quick Reference Guide C

OM

PA

RA

TIV

E F

EA

TU

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the e

mplo

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to

the a

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the e

mplo

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both

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m-

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May

this

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it

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CO

MPA

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CC

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(H

SA)


NOTES


Education Planning TAB


529 Education Savings Plan

Under IRC Sec. 529, federal tax law allows states to establish tax-advantaged sav-

ings programs to pay for students’ qualified education expenses. In these programs,

cash contributions are made to an account established for a named beneficiary,

which may or may not be the same as the account owner.

Under federal tax law, contributions are not tax deductible; however any growth in

an account is tax-deferred. Distributions used solely to pay for qualified education

expenses are federally tax-exempt. Contributions may or may not be tax deducti-

ble,

Key Definitions Under IRC Sec. 529

Qualified Education Expenses: Generally, tuition, fees, books, supplies, and equipment and technology required for attendance qualify. Reasonable costs

of room and board are also included if the student is attending school at least

half-time. Additionally, qualified education expenses include costs incurred to

allow a special needs beneficiary to enroll at and attend an eligible institution.

Eligible Educational Institution - Higher Education: Accredited post-high school educational institutions in the U.S. offering associate’s, bachelor’s, grad-

uate level, or professional degrees typically qualify as eligible. Certain voca-

tional schools and international institutions are also included.

New in 2018: Up to $10,000 per year per beneficiary for K-12 education is considered a qualified education expense.

Contributions

Contributions to a savings plan must be in cash and may not exceed the amount

necessary to provide the beneficiary’s qualified higher education. Program sponsors

will specify the maximum allowable contribution. In many programs, more than

$300,000 may be contributed for a single beneficiary. While some donors contrib-

ute lump-sum amounts, many 529 plan accounts are set up with automatic monthly

payments. Other considerations include:

For federal gift tax purposes, contributions are considered completed gifts of a present interest. Generally, no federal gift tax will be payable if a contribution

is limited to the annual gift tax exclusion amount. For 2018, this is $15,000. A

married couple can elect to split gifts for a total annual contribution of

$30,000.

The donor may elect to “superfund” a 529 plan by contributing up to 5 times the annual exclusion amount, and have such amount be treated as though it

had been made equally over 5 years, and avoid paying gift taxes. See page 59.

Contributions may be made to both a 529 savings plan and a Coverdell Educa-tional Savings Accounts (Coverdell ESA) for the same beneficiary in the same

year. Coverdell ESA annual maximum contribution per beneficiary is $2,000.


Distributions

Tax Law Change: Distribution from a 529 plan for K-12 education expenses are now allowed

up to $10,000 per year per beneficiary.

For federal income tax purposes, distributions used to pay for qualified education

expenses are generally excluded from income if the amount distributed does not ex-

ceed the amount of qualified education expenses. If a distribution is greater than the

amount of qualified education expenses, the earnings may be subject to federal income

tax and a 10% penalty tax may also apply.

Distributions due to death or disability of the beneficiary, or the recipient of certain scholarships: The earnings portion of the distribution is taxable as ordi-

nary income to the recipient of the payment.

Rollover Distributions: Federal law allows one tax-free transfer every twelve months, from one savings plan to another, for the same beneficiary. Funds may

be rolled from a 529 savings plan to a 529 pre-paid tuition plan and vice versa. If

there is a change of beneficiary within the same family (including siblings, children,

grandchildren, parents, nieces, nephews, uncles, aunts, their spouses, and first

cousins), the rollover must be completed within 60 days or the earning portion

will be subject to tax.

Other Distributions: If a distribution is made from a 529 savings plan for any other reason than qualified education expenses the earnings portion of the distri-

bution is included in the taxable income of the recipient. A 10% penalty tax is

also applied against the distributed earnings.

Coordination with Other Programs: A beneficiary may generally also claim either the American Opportunity Tax Credit or Lifetime Learning Credit (not both in

the same tax year), receive a distribution from a Coverdell ESA, or claim the

tuition and fees deduction, as long as the qualifying educational expenses are not

the same.

Education Savings Account Characteristics

There are a number of account characteristics that a donor should clearly understand:

The beneficiary must be identified at the time the account is created. The ac-count owner is usually the primary contributor; however others, such as grand-

parents, may also contribute.

The account owner may change the beneficiary. If the new beneficiary is a mem-ber of the same family, there is generally no current federal income tax liability.

Members of the same family include: siblings, children, grandchildren, parents,

nieces, nephews, uncles, aunts, their spouses, and first cousins.

Amounts accumulated in a savings plan operated by one state generally may be used at educational institutions in a different state, or even internationally.

Under federal law, 529 savings plan investments are not permitted to be self-directed by either the beneficiary or the account owner. Account owners may,

however, choose among broad investment strategies established by the program

sponsor. A change in investment strategy is generally permitted once each calen-

dar year, or when a new beneficiary is named.

Most savings plans require that funds in a custodial account become the property of the beneficiary when the beneficiary reaches his or her majority. A custodial

account is one set up under the Uniform Transfers to Minors Act (UTMA), the

Uniform Gifts to Minors Act (UGMA), or the local state version.


Superfunding a 529 Plan

“Superfunding” is another term for taking advantage of the 5-year gift-tax election

that can be made when contributing to a 529 Educational Savings Plan. A great

way to jumpstart savings for a child’s future education expenses, the tax law al-

lows an individual to contribute up to 5-times the annual gift tax exclusion amount

per beneficiary at one time without affecting their lifetime exemptions.

Eligible contributions of no more than $75,000 in a year: While an individual can

contribute up to the maximum a 529 will allow (many times $300,000 or more),

only $75,000 is eligible for the 5-year election. Thus, if an individual contributed

$100,000 in a year to a beneficiary’s 529 plan, $15,000 plus the excess over

$75,000 ($25,000) will be considered this year’s gift. The $25,000 in excess will

applied against

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