Can I Retire in a Bear Market? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “Retiring in a Bear Market? 7 Things to Do Now” says that research has shown that this scenario — known as sequence-of-return risk — can permanently reduce the amount of money you will have to live on during retirement. However, savvy retirees can avoid most or all of this damage. If you’re planning to retire right into the teeth of a bear market, consider the following:

Meet with a money pro. If you make the wrong decisions here, it can have life-altering effects. This is the perfect moment to speak with a financial adviser. The right pro can help you develop a plan.

Tighten your spending. A bear market may mean you must downsize your grand visions. The more money you keep in your wallet when the market is down, the better off you’re likely to be when the bull market returns. When the market recovers, you can pick up your dreams where you left them.

Use your savings. A great way to avoid permanently ruining your finances in retirement is to have cash savings to use when stocks collapse. Living off your liquid savings keeps you from having to cash in stocks when their value is depressed, which allows your portfolio time to recover.

Consider your Social Security options. When retiring into a bear market, you either have to take Social Security now, so you can leave your investments alone and give them more time to recover; or wait to claim Social Security, hoping that there will be bigger checks later in retirement that will help cushion the blow, if your other finances do not recover robustly. There’s no simple answer, and many factors can help you determine which strategy is best. These include your health, your risk tolerance, your marital status and many other considerations.

Review your asset allocation. Bear markets are the ultimate test of your tolerance for risk. With stocks down at least 20% — the definition of a “bear market” — consider your feelings. This can help you determine if your asset allocation is too risky, too conservative, or just right. Making certain that your allocation matches your risk tolerance will put you in a better position for the next bear market.

Going back to work. Bear markets rarely last long, often disappearing in less than a year. A part-time job or freelance work can give you a bit of extra income to ride out the storm, possibly even allowing you to leave all of your savings untouched. When the market recovers, you can return to your full-time retirement.

Stay calm. The tendency is to panic. Resist the urge.

Reference: Money Talks News (July 25, 2022) “Retiring in a Bear Market? 7 Things to Do Now”

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What’s the Most Important Step in Farm Succession? – Annapolis and Towson Estate Planning

There are countless horror stories about grandchildren in tears, as they watch family farmland auctioned off because their grandparents had to liquidate assets to satisfy the taxes.

Another tale is siblings who were once in business together and now do not talk to each other after one felt slighted because they did not receive the family’s antique tractor.

Ag Web’s recent article entitled “Who Gets What? Take This Important Estate Planning Step” says that no matter where you are in the process, you can always take another step.

First, decide what you are going to do with your assets. Each farmer operating today needs to be considering what happens, if he or she passes away tonight. Think about what would happen to your spouse or your children, and who will manage the operation.

The asset part is important because you can assign heirs to each or a plan to sell them. From a management perspective, farmers should then reflect on the wishes of your potential heirs.

Children who grew up on the farm will no longer have an interest in it. That is because they are successful in business in the city, or they just do not have an interest or the management ability to continue the operation.

After a farmer takes an honest assessment, he or she can look at several options, such as renting out the farmland or enlisting the service of a farmland management company.

Just remember to work out that first decision: What happens to the farm if I am dead?

Once you work with an experienced estate planning attorney to create this basic framework, make a habit of reviewing it regularly.

You should, at a minimum, review the plan every two to three years and make changes based on tax or circumstance changes.

Reference: Ag Web (August 1, 2022) “Who Gets What? Take This Important Estate Planning Step”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Will Inflation Have Impact on My Retirement? – Annapolis and Towson Estate Planning

Inflation means fluctuations to the dollar’s purchasing power may have a significant effect on a retiree’s ability to cover costs of living and maintain a quality of life, says Kiplinger’s recent article entitled “Is Inflation Costing You More as a Retiree?”

  1. Why Could Inflation Impact Disproportionately Retirees. Inflation impacts people differently. There are many who may not feel the effects of inflation when compared to others. However, retirees tend to spend larger portions of their income on items highly impacted by inflation, such as housing, food, gas and health care, all of which are seeing the full effect of inflation.

The recent rise of inflation forces a lot of retirees to address tough questions about how to protect their retirement savings, while covering their costs of living.

  1. The Cost of Inflation. Retirees’ sources of income may be at risk to large inflation spikes. Retirees likely have most of their income tied to markets or in fixed income. These two sources are highly impacted by inflation. Social Security does offer COLAs, but the last increase was 5.9%, which falls short of the 8% to 9% increase in prices we have seen over the past year.

Retirees frequently use savings to get them through retirement. However, when inflation happens, the purchasing power of savings declines. As a result, retirees must withdraw larger amounts of savings to cover the costs of living. This shrinks the lifespan of retirement savings.

  1. Protect Yourself with Hedges against Inflation. Inflation-protected securities can be a way to keep income on pace with inflation. Treasury Inflation-Protected Securities, commonly known as TIPS, offer an interest distribution rate that keeps pace with the CPI inflation rates. This investment has helped retirees mitigate inflation and maintain their quality of life throughout retirement without worrying about outliving their savings.

Retirees and their savings face a stormy forecast ahead due to inflation. Income sources for retirees are largely inflation-exposed, and their spending habits tend to be on products and services affected by inflation.

Reference: Kiplinger (July 16, 2022) “Is Inflation Costing You More as a Retiree?”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Should I Update My Estate Plan? – Annapolis and Towson Estate Planning

An estate plan exists to accomplish three things.

  1. Preserving your accumulated wealth
  2. To specify who will inherit your assets after your death; and
  3. To indicate who will make health care and financial decisions on your behalf if you are unable.

Real Daily’s recent article entitled “4 Good Reasons to Update Your Estate Plan” says that as you age, you should consider updating your estate plan. Why? Well, your feelings may change over time, or you may experience a significant life event that requires you to update things. These are events such as a marriage or divorce, a new child or grandchild, or a significant change in your health, wealth and outlook on life.

In addition to your will and trusts, you need to review your power of attorney, healthcare directive, living will and HIPAA waiver.

It is critical to recognize the life events that may necessitate updating your estate plan.

For example, if you are recently married or divorced, according to some state laws, existing wills are nullified when someone gets married or divorced.

It is also possible that your wealth has increased significantly, which may affect the way you view how your assets should be distributed to your beneficiaries.

Another reason to update your plan, is if you want to give more (or less) to charity or to your heirs.

Your executor or trustees may change their minds about their roles, no longer live nearby, or they themselves have died. If an individual is no longer interested in assuming those responsibilities, no longer alive, or no longer in good health or of repute, then there is a need to revise the document.

Some other reasons to update your plan include if you are in the process of retiring, moving to another state, or buying or selling real estate.

Each of these events calls for a comprehensive estate plan review.

Finally, your goals may evolve over the years as a result of changes to your lifestyle or circumstances, such as an inheritance, career change, marriage, house purchase, or a growing family.

Reference: Real Daily (June 13, 2022) “4 Good Reasons to Update Your Estate Plan”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Will My Social Security Benefits Be Taxed? – Annapolis and Towson Estate Planning

Money Talks News’ recent article entitled “These 13 States Tax Social Security Income” says the federal government can tax plenty of types of retirement income — including Social Security benefits.

The taxation does not necessarily stop with the federal government because there are a number of state governments that also expect a cut from your Social Security income. In fact, there are 13 states that tax Social Security benefits:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

Whether your Social Security retirement benefits are subject to federal income taxes is determined by your tax filing status and what the U.S. Social Security Administration calls your “combined income.” This is your wages and self-employment income, interest and dividends and other taxable income. If your benefits are subject to federal taxes, the federal government will tax up to 85% of your benefits.

States that tax Social Security benefits do so according to their own rules, which can vary from state to state and differ from the federal tax code. Therefore, even if your benefits are not subject to federal taxes, they could still be subject to state income taxes — or vice versa. It depends on how a state taxes income and whether it offers any tax breaks that apply to Social Security income.

For example, Connecticut offers some residents a full exemption from state income tax for benefits. These residents pay no taxes on Social Security income, if one of the following situations applies: (i) their federal filing status is single or married filing separately, and their federal adjusted gross income is less than $50,000; or (ii) their federal filing status is married filing jointly, head of household or qualifying widow/widower and their federal adjusted gross income is less than $60,000.

Reference: Money Talks News (Sep. 22, 2021) “These 13 States Tax Social Security Income”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What Should Small Business Owners Know about Estate Planning? – Annapolis and Towson Estate Planning

Not having an estate plan can place business owners and entrepreneurs in jeopardy because they may face difficulties in keeping the business running, if they have to withdraw from the business at any point in time.

Legal Reader’s recent article entitled “What Small Business Owners Should Know about Doing Estate Planning” explains that estate planning is necessary to ensure business continuity. Think about who can take control when you are no longer around to have the business continue according to your wishes contained in your estate plan. An experienced estate planning attorney can help business owners create a comprehensive estate plan, so things do not become chaotic for their family in the event of premature death or any permanent disability. Consider these steps when it comes to good estate planning for business owners.

Create an estate plan if you have not got one. A will is designed to detail your wishes about how you want the business to run and the manner of sharing your property at your death. A power of attorney allows an entrusted individual to undertake your business transactions and manage your finances, if you are incapacitated by injury or illness. A healthcare directive permits a trusted agent to make medical decisions on your behalf when you cannot do so yourself.

Plan for taxes. Tax planning is a major component of estate planning. Our tax laws keep changing frequently, so you have to stay in constant touch with your attorney to develop strategies for decreasing your tax liability, as well as creating a strategy for minimizing inheritance/estate taxes.

Buy life and disability insurance. Small business owners should think about purchasing life insurance, so their families can have a source of income after their death.

Create a succession plan. In addition to estate planning, a business owner should have a succession plan that specifies exactly how your company, and your family will prepare for a transition of ownership. The purpose of a well thought out succession plan is to keep the business operating or to take steps to sell it. This plan also includes the organizational structure of the business in case of maintaining business continuity.

Finally, you should keep everyone impacted by your decisions apprised of your estate plan and your business succession plan.

Reference: Legal Reader (Aug. 26, 2021) “What Small Business Owners Should Know about Doing Estate Planning”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Make the Most of a Roth IRA, Even If You’re Not Ultra-Wealthy – Annapolis and Towson Estate Planning

While it may seem like only the ultra-wealthy benefit from a Roth IRA, this retirement tool is an excellent tax shelter that anyone can use, reports CNBC.com in the recent article “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same.” One of PayPal’s founders, Peter Thiel, had $5 billion in a Roth IRA as of 2019, according to a ProPublica report. It said that he used a self-directed Roth account, which allows the owner to hold alternative assets, like shares in a private company or real estate that generally cannot be placed in a regular Roth.

Traditional 401(k) plans and IRAs offer a tax break, when contributions are made. Taxes are paid upon withdrawal, which is supposed to happen only after a certain age when you have retired. By contrast, the Roth versions of the 401(k) and IRA do not have the tax break up front—you have to pay taxes on the money or assets when making contributions—but there are no taxes paid upon withdrawal, and there are no required withdrawals, as there are with traditional IRAs and 401(k)s.

You pay income taxes on the money placed into the account, and then it grows tax free. You can take it out anytime, as long as the account has been owned for at least five years and you are age 59½ or older. Self-directed Roth IRAs permit tax-free growth and untaxed distributions plus investments can be made that are not available in regular Roth accounts.

Theil had private company shares in his self-directed Roth IRA, before PayPal was a publicly traded company. He benefited from both timing and savvy investment skills.

Self-directed IRAs are generally available only through specialized custodians. Brand-name financial companies do not offer them. The custodians that hold self-directed IRAs do not manage the account or police what investments are placed into the accounts, so you will need the advice of a tax-savvy estate planning attorney to be sure you are following the rules. Note that there can also be valuation issues. The value of alternative assets is not as clear as publicly traded securities. You will need to get the value right, so you do not break any tax laws. Once assets are in the account, you can sell them and use the proceeds to purchase other instruments in the account, all under the same tax-free Roth protection.

Even if you do not use a self-directed Roth IRA, the standard Roth IRA yields many benefits. We do not know what the future tax environment will be, but tax-free withdrawals in the future, combined with high-growth assets, make the Roth IRA a good choice for retirement nest eggs.

Reference: CNBC.com (June 24, 2021) “The ultra-wealthy have made full use of Roth individual retirement accounts. Here’s how you can do the same”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Are Roth IRAs Smart for Estate Planning? – Annapolis and Towson Estate Planning

Think Advisor’s recent article entitled “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool” says that Roth IRAs offer an great planning tool, and that the Secure Act 2.0 retirement bill (which is expected to pass) will create an even wider window for Roth IRA planning.

With President Biden’s proposed tax increases, it is wise to leverage Roth conversions and other strategies while tax rates are historically low—and the original Secure Act of 2019 made Roth IRAs particularly valuable for estate planning.

Roth Conversions and Low Tax Rates. Though tax rates for some individuals may increase under the Biden tax proposals, rates for 2021 are currently at historically low levels under the Tax Cuts and Jobs Act passed at the end of 2017. This makes Roth IRA conversions attractive. You will pay less in taxes on the conversion of the same amount than you would have prior to the 2017 tax overhaul. It can be smart to make a conversion in an amount that will let you “fill up” your current federal tax bracket.

Reduce Future RMDs. The money in a Roth IRA is not subject to RMDs. Money contributed to a Roth IRA directly and money contributed to a Roth 401(k) and later rolled over to a Roth IRA can be allowed to grow beyond age 72 (when RMDs are currently required to start). For those who do not need the money and who prefer not to pay the taxes on RMDs, Roth IRAs have this flexibility. No RMD requirement also lets the Roth account to continue to grow tax-free, so this money can be passed on to a spouse or other beneficiaries at your death.

The Securing a Strong Retirement Act, known as the Secure Act 2.0, would gradually raise the age for RMDs to start to 75 by 2032. The first step would be effective January 1, 2022, moving the starting age to 73. If passed, this provision would provide extra time for Roth conversions and Roth contributions to help retirees permanently avoid RMDs.

Tax Diversification. Roth IRAs provide tax diversification. For those with a significant amount of their retirement assets in traditional IRA and 401(k) accounts, this can be an important planning tool as you approach retirement. The ability to withdraw funds on a tax-free basis from your Roth IRA can help provide tax planning options in the face of an uncertain future regarding tax rates.

Estate Planning and the Secure Act. Roth IRAs have long been a super estate planning vehicle because there is no RMD requirement. This lets the Roth assets continue to grow tax-free for the account holder’s beneficiaries. Moreover, this tax-free status has taken on another dimension with the inherited IRA rules under the Setting Every Community Up for Retirement Enhancement (Secure) Act. The legislation eliminates the stretch IRA for inherited IRAs for most non-spousal beneficiaries. As a result, these beneficiaries have to withdraw the entire amount in an inherited IRA within 10 years of inheriting the account. Inherited Roth IRAs are also subject to the 10-year rule, but the withdrawals can be made tax-free by account beneficiaries, if the original account owner met the 5-year rule prior to his or her death. This makes a Roth IRA an ideal estate planning tool in situations where your beneficiaries are non-spouses who do not qualify as eligible designated beneficiaries.

Reference: Think Advisor (May 11, 2021) “Secure Act 2.0, Biden Tax Hike Plans Make Roth IRAs a Crucial Tool”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

What are the Big Tax Penalties to Avoid in Retirement? – Annapolis and Towson Estate Planning

Building and living off a nest egg can be a challenge. However, you can make the situation worse, if you encounter some important laws for retirement accounts.

Money Talks News’ recent article entitled “3 Tax Penalties That Can Ding Your Retirement Accounts” says make one wrong step and the federal government may want some explanations. Here are the three penalties to avoid at all costs, when contributing to or withdrawing from your retirement accounts.

Excess IRA Contribution Penalty. If you put too much away in an individual retirement account (IRA), it can cost you. The IRS says you can (i) contribute an amount of money that exceeds the applicable annual contribution limit for your IRA; or (ii) improperly roll over money into an IRA.

If you get a little too anxious to build a nest egg and make one of these mistakes, the IRS says that “excess contributions are taxed at 6% per year as long as the excess amounts remain in the IRA. The tax cannot be more than 6% of the combined value of all your IRAs as of the end of the tax year.”

The IRS has a remedy to address your mistake before any penalties are imposed. You must withdraw the excess contributions — and any income earned on those contributions — by the due date of your federal income tax return for that year.

Early Withdrawal Penalty. If you take your money out too soon from a retirement account, you will suffer another potentially costly mistake. If you withdraw money from your IRA before the age of 59½, you may be subject to paying income taxes on the money—plus an additional 10% penalty, according to the IRS. The IRS explains there are several scenarios in which you are permitted to take early IRA withdrawals without penalties, such as if you lose a job, where you can use your IRA early to pay for health insurance. The same penalties apply to early withdrawals from retirement plans like 401(k)s, although again, there are exceptions to the rule that allow you to make early withdrawals without penalty. However, note that the exceptions which let you make early retirement plan withdrawals without penalty sometimes differ from the exceptions that allow you to make early IRA withdrawals without penalty. The Coronavirus Aid, Relief, and Economic Security Act (CARES) Act of 2020 also created a one-time exception to the early-withdrawal penalty for both retirement plans and IRAs, due to the coronavirus pandemic. Therefore, coronavirus-related distributions of up to a total of $100,000 that were made in 2020 are exempt.

Missed RMD Penalty. Retirement plans are terrific because they generally let you defer paying taxes on your contributions and income gains for many years. However, at some point, the federal government will want its share of that cash. Taxpayers previously had to take required minimum distributions (RMDs) from most types of retirement accounts starting the year they turn 70½. However, the Secure Act of 2019 moved that age to 72. The consequences of failing to make RMDs still apply, and if you do not take your RMDs starting the year you turn 72, you face harsh penalties. The IRS says:

“If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required.”

It is important to understand that the RMD rules do not apply to Roth IRAs. You can leave money in your Roth IRA indefinitely, but another provision of the Secure Act means your heirs must be careful if they inherit your Roth IRA.

Reference: Money Talks News (Feb. 18, 2021) “3 Tax Penalties That Can Ding Your Retirement Accounts”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys

Estate Planning Meets Tax Planning – Annapolis and Towson Estate Planning

Not keeping a close eye on tax implications, often costs families tens of thousands of dollars or more, according to a recent article from Forbes, “Who Gets What—A Guide To Tax-Savvy Charitable Bequests.” The smartest solution for donations or inheritances is to consider your wishes, then use a laser-focus on the tax implications to each future recipient.

After the SECURE Act destroyed the stretch IRA strategy, heirs now have to pay income taxes on the IRA they receive within ten years of your passing. An inherited Roth IRA has an advantage in that it can continue to grow for ten more years after your death, and then be withdrawn tax free. After-tax dollars and life insurance proceeds are generally not subject to income taxes. However, all of these different inheritances will have tax consequences for your beneficiary.

What if your beneficiary is a tax-exempt charity?

Charities recognized by the IRS as being tax exempt do not care what form your donation takes. They do not have to pay taxes on any donations. Bequests of traditional IRAs, Roth IRAs, after-tax dollars, or life insurance are all equally welcome.

However, your heirs will face different tax implications, depending upon the type of assets they receive.

Let’s say you want to leave $100,000 to charity after you and your spouse die. You both have traditional IRAs and some after-tax dollars. For this example, let’s say your child is in the 24% tax bracket. Most estate plans instruct charitable bequests be made from after-tax funds, which are usually in the will or given through a revocable trust. Remember, your will cannot control the disposition of the IRAs or retirement plans, unless it is the designated beneficiary.

By naming a charity as a beneficiary in a will or trust, the money will be after-tax. The charity gets $100,000.

If you leave $100,000 to the charity through a traditional IRA and/or your retirement plan beneficiary designation, the charity still gets $100,000.

If your heirs received that amount, they would have to pay taxes on it—in this example, $24,000. If they live in a state that taxes inherited IRAs or if they are in a higher tax bracket, their share of the $100,000 is even less. However, you have options.

Here is one way to accomplish this. Let’s say you leave $100,000 to charity through your IRA beneficiary designations and $100,000 to your heirs through a will or revocable trust. The charity receives $100,000 and pays no tax. Your heirs also receive $100,000 and pay no federal tax.

A simple switch of who gets what saves your heirs $24,000 in taxes. That is a welcome savings for your heirs, while the charity receives the same amount you wanted.

When considering who gets what in your estate plan, consider how the bequests are being given and what the tax implications will be. Talk with your estate planning attorney about structuring your estate plan with an eye to tax planning.

Reference: Forbes (Jan. 26, 2021) “Who Gets What—A Guide To Tax-Savvy Charitable Bequests”

 

Sims & Campbell, LLC – Annapolis and Towson Estate Planning Attorneys