Transferring Company Stock From a 401(k) to an IRA? Don’t Forget The NUA!

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So, you are newly retired and thinking about what to do with your employer sponsored 401(k) account.  The stock market has gone up quite a bit recently and you’re pleased with the value of your 401(k) (or other employer sponsored account) – especially the value of the company stock in your account. You may be thinking about transferring your 401(k) to an IRA for greater investment flexibility. Before you do, you may want to consider a nifty strategy to potentially save a bundle on income taxes.

The strategy involves the net unrealized appreciation (NUA) on the company stock in your 401(k). In a nutshell, NUA is the difference between the current market value of the company stock and the price originally paid for the stock (cost basis). This NUA may be eligible for favorable capital gains tax treatment when the company stock is sold.

If you roll over your 401(k) account, including the company stock, to an IRA, and then later take distributions from the IRA, the entire distribution (including any company stock) will be subject to income tax at your ordinary income tax rate. That rate could be as high as 39.6% just for federal income taxes depending upon your tax situation.

If, instead of transferring your account balance (including the company stock) to an IRA, you take a lump-sum distribution of the entire account balance, including the company stock (sometimes called an “in-kind” distribution), the distribution of the stock will be subject to income taxes, but you will only pay long term capital gains taxes (from 0% to 20%) on the NUA when the stock is sold (you’ll pay taxes at ordinary tax rates on the cost basis portion). If you are able to complete a tax-free rollover of the remainder of the distribution (less the company stock) to an IRA, the amount rolled over escapes income taxation. The NUA strategy will not work if the stock is liquidated inside the 401(k), or rolled over to an IRA.

In order to make the strategy work, you must take an in-kind distribution of the company stock from your company retirement account as part of a lump-sum distribution of the entire account balance.  The lump sum distribution must follow a “triggering event,” such as retirement or other separation from service, attainment of age 59½, death [yes, the beneficiary of an inherited 401(k) or other employer plan account can take advantage of NUA], or disability.  The entire balance of the account must be distributed – you can’t just take an in-kind distribution of the company stock.

For those with appreciated company stock in their 401(k) or other employer-sponsored account, taking advantage of the NUA rules can help save on income taxes when the stock is sold. But like any other income tax saving strategy, especially involving retirement plan distributions, it’s complicated, and it may not work in every situation. So, before you go ahead and transfer your 401(k) account with the company stock to an IRA, sit down and consult with a qualified professional who can help you determine whether the NUA strategy is right for you.

Think the NUA strategy may work for you? Give me a call, I can help.

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The Pitfalls of Do-It-Yourself Planning

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Ed owned a bank account at First State Bank. Two months before he died, he went to the bank and named one of his five children, daughter Ann, as a joint owner of the account. He specifically selected an account with rights of survivorship, which, under Michigan law, meant that the balance of funds in the account would become Ann’s property when Ed died. After Ed’s death, Ann asserted that the money was hers and did not have to be shared with her siblings. Ed’s other four children filed a petition with the local probate court claiming that Ed had added Ann’s name solely for convenience and that he actually intended for the account proceeds to be shared equally among all of his children. The probate court held a hearing and ruled that the evidence was sufficient to establish that Ed had indeed added Ann’s name to the account merely for convenience to assist with his bill paying should he die, and that he wanted the proceeds shared among all of his children after his death.  The Michigan Court of Appeals affirmed the ruling of the probate court.

Under Michigan law, when you add a child or other person’s name to a bank account, a legal presumption arises that you intend that funds in the account belong to the survivor when you die.  Even if you intend that the account balance be shared after your death, the law presumes otherwise. This presumption can be overcome, but only if it can be proved in a court of law, by “reasonably clear and persuasive proof,” that you did not intend that the account funds vest in the survivor.  This type of proceeding can cost a fortune in legal fees. What gets less attention is the emotional cost.   Battles like this, pitting sibling against sibling, wreak havoc within a family. While Ed thought he was doing good, the actual effect of his actions was quite the opposite.

It is never a good planning move to add a child or other person’s name to a bank account or other asset without first carefully considering all of the ramifications. What Ed may have thought would be a simple way to make sure funds would be readily available to pay his bills turned out to be anything but. Ed could have given Ann his power of attorney to access the account, or created a trust to hold the account and named Ann a trustee. In either scenario Ann would have been able to pay Ed’s bills out of the account, and remainder of the account would have been shared by all of his children after his death. Sure, there may have been legal fees associated with employing those techniques. But, when one looks at the emotional and financial cost of this family’s battle, it would have been money well spent.

Many things people do in their DIY planning appear on the surface to achieve an intended goal, but end up creating serious problems that are very expensive to fix. Always, always, always, work with a competent professional. Get the peace of mind that your intentions will be fulfilled using techniques that are best suited to your individual situation. The cost to do so is pretty reasonable in the long run.

The case is: In re Estate of EDWARD SADORSKI, SR., Deceased. You can read it here.

Are you looking for solutions to your financial or estate planning problems?  Contact me, I can help.

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A New Estate Planning Tool – The Michigan Asset Protection Trust

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On February 5, 2017, Michigan became the 17th state (along with Delaware, Nevada, Ohio, and others) to permit residents to use asset protection trusts in their estate planning. Michigan’s new law, the Qualified Dispositions in Trust Act (the “Act”), allows an individual to create an irrevocable trust known as a domestic asset protection trust (DAPT) that, if set up correctly, will shield the trust’s assets from the claims of the individual’s creditors.

Until recently, asset protection trusts were available only in foreign (offshore) jurisdictions. The Bahamas, Bermuda, the Cook and Cayman Islands, Nevis, and several other jurisdictions developed highly favorable asset protection legal environments featuring sophisticated banking and trust services for clientele. Offshore asset protection statutes typically feature very short statutes of limitations periods for creditors to attack the trust, high burdens of proof for creditors, and require the creditor to challenge the trust in the jurisdiction of the trust’s location. However, with our federal government closely scrutinizing transfers of money away of the U.S., DAPTs are become more popular here in the states. In 1997, Alaska became the first state to enact a DAPT law for Alaska-based trusts.

Under the Act, a Michigan DAPT must be irrevocable, it must have a trustee located in Michigan, and, while the person who creates the trust (the “grantor”) may be a beneficiary of the trust, the grantor cannot have unrestricted access to the trust’s assets.

If a Michigan DAPT is set up correctly, a grantor’s creditors will be prohibited from reaching the trusts assets if the creditor brings a claim more than two years after the assets are placed into the trust. (A longer period applies to claims brought in bankruptcy.)  A Michigan DAPT cannot be created to defraud one’s existing creditors. Therefore, the trust must be created and funded before creditor claims arise.

The Michigan DAPT will be a useful planning tool for people with significant exposure to creditors, such as business owners and those engaged in high-risk professions, such as doctors and lawyers, where insurance may not offer adequate claim protection. A DAPT will not generally be suitable in a typical estate plan.

2017 Retirement Plan Contribution Limits

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It’s a new year and time to look at retirement plan contribution limits for 2017:

IRA and Roth IRA limits for 2017 did not change from 2016. The maximum an individual with earned income can contribute to a traditional or Roth IRA (or between the two) is $5,500. Individuals age 50 or older this year may contribute an additional $1,000.

Contribution limits for 401(k) and 403(b) plan participants likewise remain the same. The maximum a participant can contribute to a 401(k) and 403(b) plan or a Roth-type plan is $18,000. Participants who are at least 50 years of age in 2017 can elect to defer an additional $6,000, making a total contribution limit of $24,000.

SIMPLE-IRA contribution limits do not change for 2017. A SIMPLE participant may defer $12,500 of income for the year. Participants who are at least 50 years of age this year can defer an additional $3,000 into the plan for a total deferral of $15,500.

SEP-IRA contribution limits increase $1,000 to a maximum contribution of $54,000. This limit also applies to Keogh and other profit sharing plans. SEP IRA participants who are at least 50 years of age in 2017 cannot make a catch-up contribution.

The phase-out ranges for deductible IRA contributions, and the ability to make Roth IRA contributions changes slightly. If you are married filing jointly, the phase-out range to make a deductible IRA contribution is between $99,000 and $119,000. For single or head of household filers, the phase-out range for 2017 is $62,000 – $72,000. The phase-out range for those who are married but filing separately remains $0 – $10,000.

The income limits for making Roth IRA contributions increased slightly for 2017. For those who married filing jointly, the ability to make an eligible Roth IRA contribution phases out between $186,000 – $196,000 for 2017. For single or head of household filers, the phase-out range is between $118,000 – $133,000. Those who are married filing separate get a phase-out range of $0 – $10,000 (unchanged for 2017).

If you are struggling with your retirement planning, please contact me. I can help!

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Tips for Navigating Medicare Open Enrollment

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Medicare’s annual open enrollment period closes on December 7 this year.  During open enrollment, Medicare enrollees can shop for new prescription drug (Part D) or Medicare Advantage coverage. Medicare enrollees may be able to save hundreds of dollars on premiums and out-of-pocket costs by doing a checkup on their coverage and making necessary changes during the open enrollment period. Surprisingly, few enrollees bother to take advantage of this opportunity to review their existing coverage or make changes.

Morningstar contributor Mark Miller sat down for an interview recently at www.morningstar.com to discuss the potential benefits of annually reviewing your Medicare coverage, and he offers several useful tips to help navigate through the open enrollment period.

If you haven’t yet reviewed your Medicare enrollment options, or you weren’t even planning on doing so, it might help you to take a few minutes (about 8, in fact) and watch the interview to see if there might be something you can do to save money on your health care next year.  You can watch the full interview here.  I hope it helps!

Short Term Care Insurance Becoming More Popular

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According to an article at Financial Advisor online, more seniors are purchasing short-term care insurance policies to help with the costs of care. As the name implies, a short term care policy generally provides coverage for a maximum of 360 days, and can pay for assisted living, home care assistance and skilled nursing home care costs. Short-term care insurance helps seniors cover gaps in Medicare and can be an alternative to long-term care insurance when age, cost, or other factors are issues. The cost is substantially less than that of long-term care insurance. Over 90 percent of the purchasers of short-term care insurance are over the age of 60.

If you or a loved one are considering alternatives to paying for costs associated with care assistance or nursing home care, short-term care insurance may be an attractive option.  As with any insurance purchase decision, don’t invest unless you know how the policy works and fully understand its terms, including its exceptions and exclusions.

Please read the entire article here.

Do You Know These Social Security Rules for Retirees?

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Social Security is the largest public benefits program in the United States, paying money to more than 59 million beneficiaries every year.  It’s also one of the most complicated.  So it helps to know how the system works. A good article at www.mysanantonio.com covers 5 rules about Social Security retirement benefits every retiree should know:

How to Qualify. You must have 40 retirement credits, which equals 10 years of employment, to qualify for retirement benefits. The years spent working do not have to be consecutive, but a failure to earn the 40 credits will keep you from collecting. Even if you were out of the workforce for a while, you may still qualify for benefits.

When to Claim. You may begin taking your retirement benefits between the ages of 62 and 70, but the age you may receive a full retirement benefit will vary between age 66 and 67 (full retirement age), depending on your birth date. Your monthly benefit will be less if you elect to begin taking it before your full retirement age.  Your monthly benefit will increase every year that you delay claiming beyond full retirement age.

Working During Retirement. Social Security will be the main source of income for many retirees, but it may not be enough to cover all of one’s monthly living expenses. For many retirees, working at least part-time in retirement is a necessity. If you take your benefits before full retirement age, but still work, you may face a reduction in your monthly benefit if you earn more than the applicable income limits. Once you reach full retirement age, you can earn as much as you like without a corresponding benefit reduction.

Benefit Maximum. The most a person can receive monthly in Social Security benefits this year is approximately $3,500, but only if the recipient qualified for the maximum benefit at full retirement age and then waited until age 70 to begin collecting.

Benefits Are Taxable. Depending upon your combined income from all sources, up to 85% of your Social Security benefits may be subject to income tax. And it doesn’t take a lot of income to get to that point.

If you are nearing retirement age and thinking about applying for your Social Security benefits, or are already receiving them, this article contains good information you need to know. Click this link to read the entire article.

5 Ways to Put Your Tax Refund to Good Use This Year.

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Expecting a big, fat refund from the government this year? Rather than spending it on something frivolous, put it to a good long term use. Here are 5 effective ways to use your tax refund to improve your financial health:

1. Pay off a credit card. A tax refund can jump-start a debt repayment plan. If you carry a balance on a high interest (or any) credit card, use the refund to pay it off! And then use the money freed up every month to pay off another card balance. If you have no other credit card debt, then start paying yourself by banking the monthly savings.

2. Start an emergency fund. Many people live paycheck-to-paycheck with no financial cushion in case of an emergency. If you are one of them, it’s time to create an emergency fund – your own stash – for “just in case.” Who knows when the transmission on your car will need repair, or if you’ll have a medical emergency. These things happen when we least expect, or can afford them. An emergency fund will give you peace of mind and protect you should the unexpected occur.

3. Save for retirement. It’s never too late to start saving for your retirement. Use your refund to open an IRA (traditional or Roth), or consider upping your contribution to your 401(k) or other employer provided plan. Your refund can help make up the difference in your take home pay.

4. Start a college fund. If you have a child, consider starting a college savings account through a state-sponsored 529 college education savings plan. The money grows tax free, and when your child starts college, withdrawals used for qualifying education expenses are tax free. (Bonus – Michigan allows its residents a tax deduction for contributions to accounts under its program.)

5. Make a long neglected home repair. Roof worn out, furnace on its last leg, windows leaking or drafty?   Use the refund to make necessary home repairs.  Repairs can save you money in the long run in lower energy costs, improve your home’s livability, and even boost its market value.