Required Minimum Distributions from IRAs and 401(k) accounts

Required Minimum Distributions (RMDs) are calculated differently for distributions from multiple IRAs and multiple 401(k) plans.

If you have more than one traditional IRA, the RMDs are calculated separately for each IRA but can be withdrawn from any of your accounts. 

However, if you have multiple 401(k) accounts, the RMD must be calculated for each 401(k) and withdrawn separately from each account. Some 401(k) administrators calculate your required distribution and send it to you automatically if you haven't withdrawn the money by a certain date, but IRA administrators may not automatically distribute the money from your IRAs.

https://www.kiplinger.com/retirement/602564/questions-retirees-often-get-wrong-about-taxes-in-retirement

 

 

Taxation of Annuity Income

If you purchased an annuity that provides income in retirement, the portion of the payment that represents your principal is tax-free; the rest is taxable. The insurance company that sold you the annuity is required to tell you what is taxable. 

Different rules apply if you bought the annuity with pretax funds (such as from a traditional IRA). In that case, 100% of your payment will be taxed as ordinary income. In addition, be aware that you'll have to pay any taxes that you owe on the annuity at your ordinary income-tax rate, not the preferable capital gains rate.

Source:  https://www.kiplinger.com/retirement/602564/questions-retirees-often-get-wrong-about-taxes-in-retirement

Resources for Financial Caregivers

 May is Older Americans Month 

Financial caregivers are people who manage money for a loved one who may need help because of health problems or memory issues. If you don’t have a financial caregiver lined up, it helps to plan ahead in case you need help in the future. Understanding your options will allow you and your loved ones to choose what works best for your situation. Here are some free CFPB resources to help:

• Considering a financial caregiver? Know your options is a new tool to help you decide whether you or your loved one need an informal caregiver, who helps manage money on an as-needed basis, or a formal caregiver, established by a legal arrangement. The brief guide also walks you through what to consider when choosing a financial caregiver.
• Planning for peace of mind: Social Security Advance Designation explains a new tool from the Social Security Administration that allows you to recommend someone you trust to manage your Social Security benefits if you become unable to do so yourself.
• Planning for diminished capacity and illness helps you understand the potential impact of diminished capacity on your ability to make financial decisions and avoid fraud and other forms of financial abuse. The joint advisory from the Securities and Exchange Commission and CFPB encourages you to plan for possible diminished financial capacity long before it happens.
• Managing Someone Else’s Money guides explain the responsibilities of a financial caregiver, as well as how to spot financial exploitation and avoid scams. The guides are tailored to the needs of people in four different fiduciary roles: power of attorney, guardians, trustees, and government fiduciaries.

Order free print copies of these publications for yourself, and to share with older adults in your community.

 

Reverse Mortgage Resources

 The U.S. Consumer Financial Protection Bureau offers resources for older Americans on reverse mortgages. 

Reverse mortgages are one way an older homeowner can continue to live in their home without making monthly payments. However, a reverse mortgage is a loan, and a complicated product with ongoing responsibilities. 

• Reverse Mortgage Discussion Guide: A guide providing an overview of key concepts of reverse mortgage loans for older homeowners considering a reverse mortgage.
• You have a reverse mortgage: Know your rights & responsibilities: A guide on the ongoing responsibilities of a reverse mortgage loan for older homeowners who already have a reverse mortgage.
• Reverse mortgage resource page: A webpage of reverse mortgage resources, including a short video explaining the product.

Monthly Child Benefits Start in July 2021

 As reported by Jeff Stein in the Washington Post (May 17):

"The Internal Revenue Service will on July 15 start delivering a monthly payment of $300 per child under 6 and $250 per child 6 or older for those who qualify. The monthly benefits will be deposited directly in most families’ bank accounts on the 15th of every month -- or the closest day to that date, if the 15th falls on a holiday or weekend -- for the rest of the year, without any action required. For instance, an eligible family with two children aged 5 and 13 will receive $550 from the IRS directly to their bank accounts on or close to the 15th of every month from July to December." 

Fully 88% of U.S. kids qualify, with only the most wealthy not receiving the benefit. "The credit diminishes for individuals with adjusted gross income of more than $75,000, as well as couples earning more than $150,000."

Until now the U.S. has had one of the highest child poverty levels among rich nations. The Biden administration is addressing this problem with this policy initiative. 

How to use this money? For low income families, the money can be used to reduce debts, pay for child care, tutoring, summer activities while parents work and simply to improve the family's living standards.
Ideally parents can use some or all of the money to invest in their child's future by opening a 529 educational savings plan. The money grows tax-free and proceeds can be used to pay for post-secondary education as well as K-12 education. 

Mother's Day

Flowers, dining out, other soon-forgotten gifts for mother.... 

Flowers fade....  All the restaurants will be packed on Sunday; is this what you want when Covid still threatens? 

How about something that will last?  

What about an Individual Retirement Account for Mom? Whether currently employed for pay or a full-time homemaker, more than short term gifts, mom needs some long term financial security in the form of a retirement account. While IRAs generally need to be funded with earned income, a spouse of an earner is eligible for an IRA. 

Women are at much higher risk than men of financial insecurity in later life. Now is the time to start funding an IRA to ensure long-term financial health for mom.

You can start an IRA with as little as a dollar (but mom deserves more than that) at Charles Schwab. 

IRAs come in two varieties: traditional and Roth (named after a senator who sponsored the legislation). With both IRAs federal and state income taxes on the gains are deferred. The traditional IRA offers an income tax deduction for contributions, but you must pay taxes on the funds when you withdraw them in the future. With a Roth IRA there is no income tax deduction for your contributions; a Roth is funded with after-tax dollars. The money grows tax-free and withdrawals are tax-free. With the lower income tax brackets (2018 tax law) fewer taxpayers benefit from a tax deduction for contributions, thus Roth IRAs are usually the best choice.

For an explanation of IRAs and the differences between the two options see: https://investor.vanguard.com/retirement/savings/iras

https://investor.vanguard.com/ira/roth-vs-traditional-ira

Great info on investing for retirement: https://investor.vanguard.com/retirement/savings/

Also: https://investor.vanguard.com/retirement/savings/retirement-funds

Where to invest?

Vanguard is one of the best places to invest because the company is investor-owned and charges very low expense ratios. Vanguard mutual fund company, like a credit union, is owned by the people who invest their money in the funds offered by the company. Other large well-known mutual fund companies like Fidelity and T. Rowe Price are owned by outside investors who own stock in the company. These companies need to make profits for their investors so they (usually) charge higher expense ratios on their funds than Vanguard.

See: Getting started investing: https://investor.vanguard.com/investing/how-to-invest/

What is a mutual fund?

The best way to start is to open a Roth Individual Retirement Account (IRA). If you start investing now you will take maximum advantage of compound interest. See: https://investor.vanguard.com/investing/how-to-invest/risk-reward-compounding

Load vs. No-Load funds. Always choose a no-load fund. Buy directly from the mutual fund company. Avoid going through an advisor who charges a load (commission), typically 5% of every dollar invested, every time you invest.

Target Retirement Funds are a great choice. https://investor.vanguard.com/mutual-funds/target-retirement/#/

Check out the 2055 Target Retirement Fund (VFFVX) or other suitable estimated retirement year. (Every mutual fund has a unique 5 letter symbol to identify it). Or choose a fund corresponding to the year you may want to retire. Vanguard TRFs consist of four underlying index funds (U.S. stocks, bonds & international stocks & bonds). The company automatically rebalances your assets over the decades, so the fund becomes more conservative as retirement nears.

What’s an index fund? https://investor.vanguard.com/mutual-funds/index-funds

Mutual Fund Expenses. Every mutual fund charges an annual expense ratio which is a % of all assets that the company uses to pay employees and run the fund. This % isn’t deducted from your account but from the entire fund each year. You want to pay the least % possible in annual expenses so more money stays in your account to grow. Index funds charge the lowest expenses because they involve the least amount of work and trading of securities.

The expense ratio for Vanguard’s 2055 Target Retirement Fund (TRF) VFFVX is 0.16%. The average expense ratio for mutual funds is about 0.75% to 1.5%.

The minimum investment for Vanguard TRFs is $1,000.  If $1,000 is too much to start, another option is Schwab (another mutual fund company) target retirement funds. http://www.schwab.com/public/schwab/investing/accounts_products/investment/mutual_funds/mutual_fund_portfolio/target_funds\

 

Schwab charges a similar ultra-low expense ratio: but only requires $1.00 to open an account. Check out the Schwab Target Index funds. The Schwab Target 2060 Index Fund (SWYNX) charges only 0.08% annual expenses.

https://www.schwab.com/public/schwab/investing/investment_help/investment_research/mutual_fund_research/mutual_funds.html?path=%2fProspect%2fResearch%2fmutualfunds%2fsummary.asp%3fsymbol%3dSWYNX

Once you open your account with the minimum required, it’s important to set up an automatic monthly contribution to the IRA. This process of investing the same dollar amount each month is called “dollar cost averaging” which results in buying more shares when the price is low and fewer shares when the price is high. http://www.investopedia.com/terms/d/dollarcostaveraging.asp

Update: Fidelity just started (summer 2018) offering a couple of no expense ratio no minimum investment index mutual funds. https://www.fidelity.com/mutual-funds/investing-ideas/index-funds (Note: these are NOT target retirement funds).

NEW Fidelity^® ZERO Total Market Index Fund (FZROX)

• Seeks to provide investment results that correspond to the total return of a broad range of publicly traded companies in the US.

·         There is a 0% expense ratio and no minimums to invest in FZROX

NEW Fidelity^® ZERO International Index Fund (FZILX)

• Seeks to provide investment results that correspond to the total return of foreign developed and emerging stocks.

·         There is a 0% expense ratio and no minimums to invest in FZILX

Read Jonathan Clements’ take on the no-fee Fidelity funds: https://humbledollar.com/2018/08/low-fidelity/