Get Withdrawals from Retirement Accounts Right to Avoid Harsh Penalties – Annapolis and Towson Estate Planning

The next part of retirement is the “distribution” phase. That means spending those assets you’ve worked so hard to accumulate. Planning for this phase doesn’t always get the same attention as saving. However, it is just as important.

Forgetting to take required minimum distributions (RMDs) from IRAs by the due date, brings a nasty penalty: 50%. Let’s say you were supposed to withdraw $4,000 and didn’t. You’ll need to write a check to Uncle Sam for $2,000. To avoid this and other surprises, says Yahoo Finance in “Retirees Should Know These 3 Facts About Required Minimum Distributions.”

The IRS rule requires account owners to withdraw a specific amount from any qualified accounts, when the owners reach 70½. The reason is to make sure that people take the money, so the government gets tax revenues. Without it, people would live from other income and never pay taxes, leaving money to family and keeping it from the IRS.

Here’s what retirement account owners need to know about RMDs:

Retirement Accounts with RMDs include: IRAs 401(k)s,. 457 plans, TSPs, 403(b)s, SEP, Simple IRAs.

Required Withdrawals begin by April 1 of the year following the calendar year in which you turn 70½. For every subsequent year after a required beginning date, RMDs must be taken by December 31. Roth IRAs do not have RMDs.

How do you Calculate the RMD Amount? This can get a little tricky, so don’t hesitate to ask your financial advisor or CPA for help. Divide your earlier year’s December 31 retirement account balance by a “distribution period,” based on your age. Here is an example, let’s say that Marcey is 70 and must take her first RMD in the year she reaches 70½. The year-end balance of her IRA was $100,000. Her “distribution period” factor is 27.4. Dividing $100,000 by 27.4 is $3,649.63. That’s the amount she must take for the calendar year in which she turns 70½.

Reference: Yahoo Finance (December 13, 2019) “Retirees Should Know These 3 Facts About Required Minimum Distributions”

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

How Can Life Insurance Help My Estate Plan? – Annapolis and Towson Estate Planning

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

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

What’s the Best Way to Take My Required Minimum Distribution? – Annapolis and Towson Estate Planning

CNBC’s recent article, “These tips can help retirees make required minimum distributions easy and tax penalty free,” gives the steps to follow, so we don’t leave money on the table.

RMDs or required minimum distributions, are the minimum amount people age 70½ and older must withdraw from their retirement funds. If you’ve inherited a retirement account, you may also have to make a withdrawal. The amount you need to withdraw varies from year to year and is based on specific calculations, including what your account values were as of December 31 the prior year and your age.

The time to get started on your RMD for this year is right now, because the paperwork may take some time. You have until April 1, if you just turned 70½ this year. Let’s look at a few tips:

Get your paperwork organized. In order to know how much you have to withdraw, you have to have an accurate picture of what you own. Create a list of accounts and take an inventory first, so you know where all your retirement accounts are located.

Know what you can take from what account. If you have multiple IRAs, you can take your total RMD from any one of those accounts because of the aggregation rule. However, with multiple IRAs, you still must calculate the amount you take out based on the value of all of them. It’s that same with multiple 403(b) retirement accounts. The rule doesn’t apply to 401(k) plans. If you have multiple 401(k) accounts, you must take money from each one, and you can’t take an RMD from an IRA to satisfy a 401(k), or vice versa.

Understand the rules, if you’re still working. If you’re 70½ and still employed, you could get a break from taking your RMD in certain circumstances. Generally, 401(k) plans have a still-working rule, which stipulates that you don’t have to take the RMD until you retire. However, you can only delay the RMDs, if the plan is attached to the company where you’re currently employed. Other accounts from a previous employer are excluded, so you must still take distributions from those.

Keep an eye on any inherited accounts. If you’ve inherited a retirement account, you may have to take an RMD by the end of this year. That generally doesn’t apply if you inherited the money from your spouse, because spouses can do a rollover and keep postponing the distributions. However, if you’re a non-spouse beneficiary, you probably must take a distribution by the end of 2019. If you inherited the account in 2018, you’ll need to take your first RMD in 2019.

RMDs from a Roth IRA will likely be tax-free. However, if you’ve inherited one of these accounts and you didn’t take that money out, you’ll have to pay a 50% penalty on the funds you should’ve withdrawn.

Consider giving to charity. A good way to avoid paying taxes on your RMD, is to give the money to charity. A qualified charitable distribution lets you make donations to a charity directly from your IRA, instead of taking the RMD yourself. Therefore, if your RMD is $5,000, and you typically give $5,000 to charity each year, you can donate that money directly and not pay tax on it.

Reference: CNBC (November 29, 2019) “These tips can help retirees make required minimum distributions easy and tax penalty free”

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

I’ve Inherited an IRA – Now, What about Taxes? – Annapolis and Towson Estate Planning

Inheriting an IRA comes with several constraints. As a result, it can be tricky to navigate. You are at an intersection of tax planning, financial planning and estate planning, says Bankrate’s article “7 inherited IRA rules all beneficiaries must know.” There are a number of choices for you to make, depending upon your situation. How can you figure out what to do?

Whatever your situation, do NOT cash out the IRA, or roll it into a non-IRA account. Doing this could make the entire IRA taxable as regular income. Do nothing until you have the right advisors in place. For most people, the best step is to find an estate planning attorney who is experienced with inherited IRAs.

Here’s what you need to know:

The rules are different for spouses. A spouse heir of an IRA can do one of three things:

  • Name himself as the owner and treat the IRA as if it was theirs;
  • Treat the IRA as if it was his, by rolling it into another IRA or a qualified employer plan, including 403(b) plans;
  • Treat himself as the beneficiary of the plan.

Each of these actions may create additional choices for the spousal heir. For example, if a spouse inherits the IRA and treats it as his own, he may have to start taking required minimum distributions, depending on his age.

“Stretch” or choose the 5-year rule. Non-spouse heirs have two options:

  • Take distributions over their life expectancy, known as the “stretch” option, which leaves the funds in the IRA for as long as possible, or
  • Liquidate the entire account within five years of the original owner’s death. That comes with a hefty tax burden.

Congress is considering legislation that may eliminate the stretch option, but the proposed law has not been passed as of this writing. The stretch option is the golden ticket for heirs, letting the IRA grow for years without being liquidated and having to pay taxes. If the IRA is a Roth IRA, taxes were paid before the money went into the account.

Non-spouse beneficiaries need to act promptly, if they want to take the stretch option. There is a cutoff date for taking the first withdrawal, depending upon whether the original account owner was over or under 70 ½ years old.

There are year-of-death distribution requirements. If the original owner has taken his or her RMD in the year that they died, the beneficiary needs to make sure the minimum distribution has been taken.

There might be a tax break. For estates subject to the federal estate tax, inheritors of an IRA may get an income-tax deduction for the estate taxes paid on the account. The taxable income earned (but not received by the deceased individual) is “income in respect of a decedent.”

Make sure the beneficiary forms are properly filled out. This is for the IRA owners. If a form is incomplete, doesn’t name a beneficiary or is not on record with the custodian, the beneficiary may be stuck with no option but the five-year distribution of the IRA.

A poorly drafted trust can sink the IRA. If a trust is listed as a primary beneficiary of an IRA, it must be done correctly. If not, some custodians won’t be able to determine who the qualified beneficiaries are, in which case the IRS’s accelerated distribution rules for IRAs will be required. Work with an estate planning attorney who is experienced with the rules for leaving IRAs to trusts.

Reference: Bankrate (Nov. 19, 2019) “7 inherited IRA rules all beneficiaries must know.”

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

How Can I Upgrade My Estate Plan? – Annapolis and Towson Estate Planning

Forbes’ recent article, “4 Ways To Improve Your Estate Plan,” suggests that since most people want to plan for a good life and a good retirement, why not plan for a good end of life, too? Here are four ways you can refine your estate plan, protect your assets and create a degree of control and certainty for your family.

  1. Beneficiary Designations. Many types of accounts go directly to heirs, without going through the probate process. This includes life insurance contracts, 401(k)s and IRAs. These accounts can be transferred through beneficiary designations. You should update and review these forms and designations every few years, especially after major life events like divorce, marriage or the birth or adoption of children or grandchildren.
  2. Life Insurance. A main objective of life insurance is to protect against the loss of income, in the event of an individual’s untimely death. The most important time to have life insurance is while you’re working and supporting a family with your income. Life insurance can provide much needed cash flow and liquidity for estates that might be subject to estate taxes or that have lots of illiquid assets, like family businesses, farms, artwork or collectibles.
  3. Consider a Trust. In some situations, creating a trust to shelter or control assets is a good idea. There are two main types of trusts: revocable and irrevocable. You can fund revocable trusts with assets and still use the assets now, without changing their income tax nature. This can be an effective way to pass on assets outside of probate and allow a trustee to manage assets for their beneficiaries. An irrevocable trust can be a way to provide protection from creditors, separate assets from the annual tax liability of the original owner and even help reduce estate taxes in some situations.
  4. Charitable Giving. With charitable giving as part of an estate plan, you can make outright gifts to charities or set up a charitable remainder annuity trust (CRAT) to provide income to a surviving spouse, with the remainder going to the charity.

Your attorney will tell you that your estate plan is unique to your situation. A big part of an estate plan is about protecting your family, making sure assets pass smoothly to your designated heirs and eliminating stress for your loved ones.

Reference: Forbes (November 6, 2019) “4 Ways To Improve Your Estate Plan”

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

What Do I Do With an Inherited IRA? – Annapolis and Towson Estate Planning

When a family member dies and you discover you’re the beneficiary of a retirement account, you’ll need to eventually make decisions about how to handle the money in the IRA that you will be inheriting.

Forbes’ recent article, “What You Need To Know About Inheriting An IRA,” says that being proactive and making informed decisions can help you reach your personal financial goals much more quickly and efficiently. However, the wrong choices may result in you forfeiting a big chunk of your inheritance to taxes and perhaps IRS penalties.

Assets transferred to a beneficiary aren’t required to go through probate. This includes retirement accounts like a 401(k), IRA, SEP-IRA and a Cash Balance Pension Plan. Here is some information on what you need to know, if you find yourself inheriting a beneficiary IRA.

Inheriting an IRA from a Spouse. The surviving spouse has three options when inheriting an IRA. You can simply withdraw the money, but you’ll pay significant taxes. The other options are more practical. You can remain as the beneficiary of the existing IRA or move the assets to a retirement account in your name. Most people just move the money into an IRA in their own name. If you’re planning on using the money now, leave it in a beneficiary IRA. You must comply with the same rules as children, siblings or other named beneficiaries, when making a withdrawal from the account. You can avoid the 10% penalty, but not taxation of withdrawals.

Inheriting an IRA from a Non-Spouse. You won’t be able to transfer this money into your own retirement account in your name alone. To keep the tax benefits of the account, you will need to create an Inherited IRA For Benefit of (FBO) your name. Then you can transfer assets from the original account to your beneficiary IRA. You won’t be able to make new contributions to an Inherited IRA. Regardless of your age, you’ll need to begin taking Required Minimum Distributions (RMDs) from the new account by December 31st of the year following the original owner’s death.

The Three Distribution Options for a Non-Spouse Inherited IRA. Inherited IRAs come with a few options for distributions. You can take a lump-sum distribution. You’ll owe taxes on the entire amount, but there won’t be a 10% penalty. Next, you can take distributions from an Inherited IRA with the five-year distribution method, which will help you avoid RMDs each year on your Inherited IRA. However, you’ll need to have removed all of the money from the Inherited IRA by the end of five years.

For most people, the most tax-efficient option is to set up minimum withdrawals based on your own life expectancy. If the original owner was older than you, your required withdrawals would be based on the IRS Single Life Expectancy Table for Inherited IRAs. Going with this option, lets you take a lump sum later or withdraw all the money over five years if you want to in the future. Most of us want to enjoy tax deferral within the inherited IRA for as long as permitted under IRS rules. Spouses who inherit IRAs also have an advantage when it comes to required minimum distributions on beneficiary IRAs: they can base the RMD on their own age or their deceased spouse’s age.

When an Inherited IRA has Multiple Beneficiaries. If this is the case, each person must create his or her own inherited IRA account. The RMDs will be unique for each new account based on that beneficiary’s age. The big exception is when the assets haven’t been separated by the December 31st deadline. In that case, the RMDs will be based on the oldest beneficiaries’ age and will be based on this until the funds are eventually distributed into each beneficiary’s own accounts.

Inherited Roth IRAs. A Roth IRA isn’t subject to required minimum distributions for the original account owner. When a surviving spouse inherits a ROTH IRA, he or she doesn’t have to take RMDs, assuming they retitle the account or transfer the funds into an existing Roth in their own name. However, the rules are not the same for non-spouse beneficiaries who inherit a Roth. They must take distributions from the Roth IRA they inherit using one of the three methods described above (a lump sum, The Five-Year Rule, or life expectancy). If the money has been in the Roth for at least five years, withdrawal from the inherited ROTH IRA will be tax-free. This is why inheriting money in a Roth is better than the same amount in an inherited Traditional IRA or 401(k).

Speak with an experienced estate planning attorney about an Inherited IRA. The rules can be confusing, and the penalties can be costly.

Reference: Forbes (September 19, 2019) “What You Need To Know About Inheriting An IRA”

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

Here’s What You May Not Know About Roth IRAs – Annapolis and Towson Estate Planning

There is a lot that most people don’t know about Roth IRAs, as detailed in the article “9 Surprising Facts About Roth IRAs” from the balance. Some of them may surprise you.

Roth IRA contributions can be used for emergencies. In a perfect world, no one would ever need to use retirement money for anything but retirement, but because Roth contributions are not deductible, they can be withdrawn at any time, for any reason, without taxes or penalties. A Roth IRA can serve as an emergency fund. However, it needs to be noted that the funds you can withdraw do not include amounts that were converted to a Roth IRA or investment gains. Therefore, if you put $5,000 into a Roth IRA that grew to $6,000, you may only withdraw the $5,000 without taxes and penalties.

You might be able to use a non-deductible IRA to fund a Roth. If you make over a certain limit, you can’t contribute to a Roth IRA—or can you? Some people who keep other retirement money inside qualified retirement accounts are permitted to make a non-deductible IRA contribution every year and then convert that into a Roth. This is sometimes called the “backdoor Roth.” However, you’ll need to be careful, and you may need help. In some cases, you can even roll a self-directed IRA back into a company plan, so in future years you could use the backdoor Roth strategy without having to pay taxes on the converted amount. Get a professional to help you with this: mistakes can be expensive!

You may roll after-tax 401(k) contributions into a Roth IRA. Many employer plans let you make after-tax contributions and then, at retirement, these after-tax contributions can be rolled into a Roth IRA. Any investment gain on the after-tax contributions can’t go into the Roth, but the contributions can.

Roth IRAs have no RMDs (Required Minimum Distributions). There aren’t any age requirements for when you take money out, so there are no delayed tax bombs lurking. However, non-spouse heirs will have to take required distributions from an inherited Roth. The nice thing: they will be tax free.

You can contribute to both a SIMPLE IRA and a Roth IRA. As long as your income is within the Roth IRA limits, then you can contribute to both the SIMPLE and the Roth. The contributions to the SIMPLE IRA will be deductible, the Roth contributions will not be. This dual funding strategy lets you reduce taxable income now and have funds in the Roth accumulate for tax-free benefits in retirement. For the self-employed person, who is diligent about saving for retirement, this is a good plan.

Your employer plan may allow Roth contributions. Many 401(k) plans let you make Roth contributions. They are called “designated Roth accounts.” Check with your HR department to see if their plan let you choose which type of contribution to make. Some may be all or nothing, while others let you do some of each.

Age is not the key factor in determining whether or not to use a Roth IRA. The primary deciding factor here is your income bracket, your tax rate now and your expected tax rate during retirement. If your expected tax rate during retirement will be lower, the deductible contributions may be better. If your tax rate during retirement is going to be the same or higher in retirement, which is often the case for people with large IRAs or 401(k)s, then a Roth IRA may make a lot of sense, regardless of your age.

You might be able to make a spousal Roth contribution. Even if your spouse has no earned income, as long as you have an earned income, you can make an IRA contribution on their behalf. Many couples can double their tax favored retirement account savings by doing this.

Be careful about Roth conversions. As stated previously, mistakes here can become expensive, so don’t rely on online Roth calculators to manage conversions. Talk with an experienced professional who can help make sure that your numbers and your strategy fits with your personal retirement scenario. Every person and every situation is different, so planning needs to be specific to your needs.

Reference: the balance (August 13, 2019) “9 Surprising Facts About Roth IRAs”

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

Stretch IRA May be Disappearing Soon – Annapolis and Towson Estate Planning

Short of calling your representatives in Congress and hollering, there’s not much any of us can do about a proposed change to the rules that govern IRAs, reports nj.com in the article “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress.”

For years, non-spouse beneficiaries who inherit IRAs have had the ability to stretch out required distributions over their lifetimes. That meant that inherited IRAs could stay safe and sound out of the IRS’s reach, except for annual distributions that were quite small. If a grandchild inherited the IRA, the wealth stretched even further.

Depending on the final details of the legislation, the only people who will be able stretch an IRA will be spouses.

Current rules require non-spouse beneficiaries to take required minimum distributions (RMDs) every year over the course of their life expectancy, as per the IRS life expectancy tables. Because they are taken over the lifetime of a younger beneficiary, they can be small. This means the impact of the distribution on the individual’s income taxes are minimal and the IRA can grow tax deferred over a long period of time.

Congress is looking for revenue and the wealth of Americans in IRA accounts is in their sight lines.

First, the House passed the SECURE Act, which says that beneficiaries must completely empty their inherited IRAs within 10 years of ownership. The Senate then passed the RESA Act, which is a little different. It would allow a stretch for the first $450,000 of aggregated IRAs, then anything over that would have to be distributed within five years.

Both bills call for changes to apply to inherited IRAs and inherited Roth IRAs for deaths after December 31, 2019. What’s the bottom line? The Joint Committee on Taxation expects that these changes, if they become law, will yield $15.7 billion—with a “B”—in additional tax revenue through 2029.

The government would eventually get this money anyway, but this speeds things up considerably.

Let’s compare and contrast. An 80-year old woman has a traditional IRA worth $1 million. She dies and her 55-year-old daughter is the primary beneficiary. Under the current rules, the daughter’s first RMD is roughly $35,000. If the 25-year-old granddaughter was the beneficiary, the RMD would be roughly $18,000.

If the account earns an average of 5% annually, under the current rule, the granddaughter would have distributions of some $220,000 over ten years. If she had ten years to take the money out, she’d have about $1.3 million in distribution. Under the current rule, the account would have a $1.3 million balance after ten years, since the principal would continue to appreciate. Under the proposed rules, after ten years, it would be zeroed out.

The forced larger distributions will push heirs into higher income tax brackets. That will be followed by increased Medicare premiums, as heirs retire with higher income. Add to that: higher capital gains rate, from as low as zero to as high as 20%. If that’s not bad enough, it could also trigger the 3.8% net Investment Income tax.

One option is to move funds from a regular IRA to a Roth IRA, assuming the investor meets all the requirements to do so. The Roth IRA distributions would not be taxable (unless those laws change) but that also requires the current owner to pay taxes on funds moved to the Roth IRA.

Another option is to consider a Charitable Remainder Trust (CRT) that names a charity as the IRA beneficiary. Upon the death of the owner, the IRA is distributed to the CRT, and the IRA owner’s heir would receive a fixed percentage of the CRT’s value for the remainder of their lives. When the heir dies, the money in the CRT goes to a charity or charities designated by the IRA owner, when the trust was created.

For now, these are proposed pieces of legislation, but chances are good they will be passed soon. Now is a good time to meet with your estate planning attorney to do what you can to protect your IRA and your children’s inheritance.

Reference: nj.com (June 10, 2019) “Your kid’s inheritance could take a giant tax hit if these bills become law. Thanks, Congress”

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

Retirement Minimum Distribution (RMDs) Fundamentals – Annapolis and Towson Estate Planning

Most people don’t know the rules about required minimum distributions. Also known as “RMDs,” these are the rules that require investors to make withdrawals from their retirement accounts the year that they turn 70½. However, says Forbes in the article “5 Things to Know About RMDs,” these withdrawals can have a major impact on cash flow, taxes and financial planning during retirement. They are legally required to be taken, even if you don’t need them.

If the RMD is not taken at the correct age, there will be a 50% tax on the amount that should have been withdrawn. Add to that the amount of regular income tax on the sum of money withdrawn, and you have an expensive mistake.

There are ways to soften the impact of RMDs. However, you have to know the rules before you can create your strategy. Having a game plan for RMDs will help save the money you saved for many years, and allow that retirement nest egg more time to grow.

Note that there may be some changes coming as a result of the SECURE Act and the RESA Act, if approved.

Distribution rules that you need to know. The year you mark your 70½ birthday, that is, six months after you turn 70, you have to start taking RMDs from retirement accounts, including 401(k)s. That rule does not apply to Roth IRAs, which generally do not have any RMDs, until the owner dies.

The exception is if you are still working at a company and participating in the company’s 401(k) plan. If that is the case, you may want to roll over all your previous eligible savings into that account, to delay taking an RMD. However, there are also exceptions to this rule. They depend on your ownership stake in the company, so speak with an estate planning attorney to be sure what the requirements are for your situation.

While you’re at it, make sure that the beneficiaries listed on your accounts are correctly documented. If it’s been more than a few years since you last reviewed your beneficiaries, there may be some time bombs hidden in your IRA accounts. Divorce, death and changes of circumstances may make it necessary for you to change your beneficiaries. Do it now, while it’s on your mind. Once you die, there’s no recourse for your heirs.

When do I take my first RMD? RMDs must be taken by December 31st of each calendar year. However, the first RMD must be taken for the year in which you turn 70½. You can delay that payment until April of the following year. If you end up taking two big distributions, will it throw your tax planning off? Will you be bumped into a higher tax bracket? This is why you need to plan your RMD out carefully. It may be better for your overall situation to take the RMD, as soon as you are eligible.

Accuracy counts. You can’t rely on an online calculator, since the rules are not one size fits all. Let’s say your spouse is ten years younger than you and is your sole beneficiary. You’ll need to use the Joint Life and Last Survivor Table. There’s also the Uniform Lifetime Table, but that doesn’t apply here. Check with professionals to be sure you are taking the right amount.

Where does your RMD come from? Even if 70½ is a few years away, it’s good to have a plan for how RMDs will impact the distribution of your investment portfolio. You have options, so you want to make a good choice. For example, do you want distributions to be made in proportion to the percentage of each of your holdings in your portfolio? Let’s say 40% of your retirement investment is in short-term bonds, then you would take out 40% from your investment holdings. Or do you want to take a percentage from specific holdings?

What about charitable giving? Once you turn 70 ½, you can directly transfer funds from a traditional IRA to a charity, which can reduce your tax burden. However, this must be done properly, directly to the charity.

The rules of RMD are complicated, and mistakes can be expensive. Think about your strategy early on, to make sure it’s done right.

Reference: Forbes (May 14, 2019) “5 Things to Know About RMDs”

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

Are Inheritances Taxable? – Annapolis and Towson Estate Planning

Inheritances come in all sizes and shapes. People inherit financial accounts, real estate, jewelry and personal items. However, whatever kind of inheritance you have, you’ll want to understand exactly what, if any, taxes might be due, advises the article “Will I Pay Taxes on My Inheritance” from Orange Town News. An inheritance might have an impact on Medicare premiums, or financial aid eligibility for a college age child. Let’s look at the different assets and how they may impact a family’s tax liability.

Bank Savings Accounts or CDs. As long as the cash inherited is not from a retirement account, there are no federal taxes due. The IRS does not impose a federal inheritance tax. However, there are some states, including Iowa, Kentucky, Maryland, Nebraska, New Jersey and Pennsylvania, that do have an inheritance tax. Speak with an estate planning attorney about this tax.

Primary Residence or Other Real Estate. Inheriting a home is not a taxable event. However, once you take ownership and sell the home or other property, there will be taxes due on any gains. The value of the home or property is established on the day of death. If you inherit a home valued at death at $250,000 and you sell it a year later for $275,000, you’ll have to declare a long-term capital gain and pay taxes on the $25,000 gain. The cost-basis is determined when you take ownership.

Life Insurance Proceeds. Life insurance proceeds are not taxable, nor are they reported as income by the beneficiaries. There are exceptions: if interest is earned, which can happen when receipt of the proceeds is delayed, that is reportable. The beneficiary will receive a Form 1099-INT and that interest is taxable by the state and federal tax agencies. If the proceeds from the life insurance policy are transferred to an individual as part of an arrangement before the insured’s death, they are also fully taxable.

Retirement Accounts: 401(k) and IRA. Distributions from an inherited traditional IRA are taxable, just as they are for non-inherited IRAs. Distributions from an inherited Roth IRA are not taxable, unless the Roth was established within the past five years.

There are some changes coming to retirement accounts because of pending legislation, so it will be important to check on this with your estate planning attorney. Inherited 401(k) plans are or eventually will be taxable, but the tax rate depends upon the rules of the 401(k) plan. Many 401(k) plans require a lump-sum distribution upon the death of the owner. The surviving spouse is permitted to roll the 401(k) into an IRA, but if the beneficiary is not a spouse, they may have to take the lump-sum payment and pay the resulting taxes.

Stocks. Generally, when stocks or funds are sold, capital gains taxes are paid on any gains that occurred during the period of ownership. When stock is inherited, the cost basis is based on the fair market value of the stock or fund at the date of death.

Artwork and Jewelry. Collectibles, artwork, or jewelry that is inherited and sold will incur a tax on the net gain of the sale. There is a 28% capital gains tax rate, compared to a 15% to 20% capital gains tax rate that applies to most capital assets. The value is based on the value at the date of death or the alternate valuation date. This asset class includes anything that is considered an item worth collecting: rare stamps, books, fine art, antiques and coin collections fall into this category.

Speak with an estate planning attorney before signing and accepting an inheritance, so you’ll know what kind of tax liability comes with the inheritance. Take your time. Most people are advised to wait about a year before making any big financial decisions after a loss.

Reference: Orange Town News (May 29, 2019) “Will I Pay Taxes on My Inheritance”

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

For Immediate Release

Contact: Jane Frankel Sims

410-828-7775

Contact: Frank Campbell

410-263-1667

Sims & Campbell Estates and Trusts

Frankel Sims Law and Holden & Campbell
Merge to Form Sims & Campbell

Firm will offer comprehensive Trusts & Estates services through offices in Towson and Annapolis

TOWSON, Md. (April 26,2019)  Frankel Sims Law and Holden & Campbell have jointly announced the merger of their firms to create a boutique Trusts & Estates law firm providing comprehensive services in the fields of Estate Planning, Estate Administration, Trust Administration and Charitable Giving. The combined firm will be named Sims & Campbell and have offices in Towson, Md. and Annapolis, Md.  Jane Frankel Sims and Frank Campbell will lead and hold equal ownership stakes in the firm.

Sims & Campbell will have 9 attorneys and 15 legal professionals that handle every facet of estate and wealth transfer planning, including wills, revocable living trusts, irrevocable trusts, estate and gift tax advice, and charitable giving strategies.  The firm will focus solely on Trusts & Estates but will serve a wide range of clients, from young families with modest resources to ultra-high net worth individuals.  This allows clients to remain with the firm as their level of wealth and the complexity of related estate and tax implications change over time. 

“By joining forces, we have expanded our footprint to conveniently serve clients in Maryland, D.C. and Virginia” said Jane Frankel Sims.  We are seeing some of the greatest wealth transfer in our country’s history, and we want to continue to be on the leading edge of helping our clients maintain and enhance their family’s wealth.  In addition, we aim to serve our clients for years to come, and the new firm structure will allow Sims & Campbell to thrive even after Frank and I have retired.”    

“Jane and I have always admired each other’s firms and recognized the need to provide even greater depth and breadth of focused expertise to help families amass and protect their wealth from generation to generation,” said Frank Campbell.  “Now we have even greater capabilities to make a real difference for our clients.” 

The Sims & Campbell Towson office is located at 500 York Road, on the corner of York Road and Pennsylvania Avenue in the heart of Towson.  The Annapolis office is currently located at 716 Melvin Avenue, and is moving to 181 Truman Parkway in August, 2019.  For more information, visit www.simscampbell.law.