Social Security

Required Minimum Distribution (RMD) Rules: 4 Key Things Every Retiree Should Know

· November 10, 2021 · Investing, Retirement, Social Security, Taxes · , · No Comments

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Most people worry about not having enough money for retirement. But did you also know that there is such a thing as having too much money? Too much money may not necessarily be a bad thing, but you do need to worry about required minimum distributions (RMDs). Here’s what you need to know about RMDs.

RMDs Depend on Your Age

The main point of RMDs is to keep money from staying tax-free forever. The government gave a temporary tax break to encourage you to save for retirement, but it still wants that tax money. A required minimum distribution is a required withdrawal from your retirement account. It counts in your taxable income just like any other withdrawal in retirement.

Currently, RMDs start when you hit age 72 (or 70½ if you turned 70½ prior to January 1, 2020) and they are calculated to empty your retirement account within your expected life expectancy. (1) Each year, you need to withdraw a certain percentage of your account with the percentage going up as you age. However, it’s important to realize that you do not have to spend all of this money. You can also reinvest it into a taxable account.

Not Taking the RMD Can Mean Big Penalties

Thinking about skipping RMDs to avoid taxes? Think again. Not only do you still have to pay the taxes on the RMD amount, but you’ll also owe a 50 percent penalty.

For example, if you were supposed to withdraw $10,000 but didn’t, the IRS will charge you an extra $5,000. The penalty repeats every year until you catch up on your RMDs from previous years.

RMDs Can Throw a Wrench in Your Tax Planning

There are many reasons why you might want to reduce your taxable income in retirement. These can include qualifying for things like Medicaid subsidies, avoiding taxes on your Social Security benefits, trying to stay in a lower capital gains tax bracket, or just wanting to pay fewer taxes.

Required minimum distributions can throw a major wrench in your tax planning because not only are they not avoidable, they can suddenly increase if the market surges. If you’re using a tax strategy that requires reducing your income to a certain level, it’s important to build in flexibility for your RMDs.

RMDs Can Be Avoided

There are still ways to reduce or even avoid RMDs altogether. The main idea is to get the money out of your retirement account when you want to not when the IRS wants you to.

One method is to make extra withdrawals at the end of the year. In December, you can estimate your taxes for the year. If you still have room in a lower tax bracket or below the income you need to stay under, you can withdraw additional money. When next year’s RMDs are calculated, it will be on a lower account balance.

You can also convert to a Roth IRA instead of taxing the money out of a tax-advantaged account. Roth IRAs don’t have RMDs because the money has already been taxed. When you make the conversion, you pay ordinary income tax rates on the amount you converted. There are no penalties even if you do the conversion before you turn 59 1/2.

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Sources

  1. https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-required-minimum-distributions-rmds

This content is developed from sources believed to be providing accurate information, and provided by Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.

The Social Security Administration Announced the 2022 Cost of Living Adjustment (COLA) is 5.9%

· October 28, 2021 · Retirement, Social Security · No Comments

On October 13, 2021, the Social Security Administration (SSA) officially announced that Social Security recipients will receive a 5.9 percent cost-of-living adjustment (COLA) for 2022, the largest increase in four decades. This adjustment will begin with benefits payable to more than 64 million Social Security beneficiaries in January 2022. Additionally, increased payments to more than 8 million Supplemental Security Income (SSI) beneficiaries will begin on December 31, 2021. (1)

Biggest COLA Increase in Decades?

While many predicted a bump of as much as 6.1% given recent movement in the Consumer Price Index (CPI), the announced 5.9% increase is still substantial. Some fear that rising consumer prices may dilute the impact of the increase with inflation currently running at more than 5 percent. While this remains to be seen, Social Security beneficiaries will no doubt welcome the largest adjustment in many years.1

How You Will Be Notified

According to the Social Security Administration, Social Security and SSI beneficiaries are usually notified about their new benefit amount by mail starting in early December. However, if you’ve set up your SSA online account, you will also be able to view your COLA notice online through your “My Social Security” account. (1)

Next Steps?

If this increase surprises or concerns you, it’s always a good idea to seek guidance from your financial professional about changes to any of your sources of retirement income. I welcome a chance to talk with you about this.

▲ Social Security Timing Tradeoffs

Surprisingly few Americans understand the benefits and trade-offs related to claiming Social Security at various ages. The top graphic illustrates these tradeoffs for people whose Full Retirement Age (FRA) is 66. Delaying benefits results in a much higher benefit amount: Waiting to age 70 results in 32% more in a benefit check than taking benefits at FRA. Likewise, taking benefits early will lower the benefit amount. At age 62, beneficiaries would have received only 75% of what they would get if they waited until age 66. FRA for individuals turning 62 in 2021 is 66 and 10 months, and FRA will continue to move 2 more months in 2022, when it will reach and remain at age 67. The Social Security Amendments Act of 1983 increased FRA from 65 to 67 over a 40-year period. The first phase of transition increased FRA from 65 to 66 for individuals turning 62 between 2000 and 2005. After an 11-year hiatus, the transition from 66 to 67 will complete the move.

The bottom graphic shows the tradeoffs for younger individuals, who will be penalized for early claiming to a greater degree. The percentages shown are “real” amounts – cost-of-living adjustments (COLA) will be added on top, providing an even greater difference between the actual dollar benefits one would receive. The average annual COLA for the past 36 years has been 2.5%.

Sources

  1. SSA.gov, October 13, 2021
  2. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/retirement-insights/guide-to-retirement/#

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Will There Be a Big Cost of Living Adjustment for Social Security Benefits in 2022?

· August 11, 2021 · Retirement, Social Security · No Comments

Photo by iStock

The news keeps getting better for Social Security recipients.

It’s now projected that benefits will increase 6.1% in 2022, up from the 4.7% forecast just two months ago. That would be the most significant increase since 1983. (1,2)

It’s all about inflation. Social Security cost of living adjustments (COLA) are based on the consumer price index, which rose 5.4% in June — its largest 12-month increase since 2008. The official announcement is expected in October and, once it’s confirmed, the revised payment will go into effect in January 2022. (3)

More than 65 million Americans receive Social Security, and the annual cost of living adjustments are designed to help recipients manage higher costs. At the start of 2021, recipients saw a 1.3% increase. (4)

The average monthly benefit is $1,544 for retired workers. So a 6.1% increase amounts to $94 more a month. That might not be quite enough for a car payment, but it’s double the 3% raise being given to U.S. workers in 2021. (4,5)

Social Security can be confusing. One survey found only 6% of Americans know all the factors that determine the maximum benefits someone can receive. If you have any questions, please reach out. We have a number of resources at our fingertips that you may find helpful. (6)

Claiming Social Security – decision tree

This decision tree is designed to help individuals think through some of the factors related to when to take Social Security benefits. Working, having other sources of income, expected longevity, preserving a portfolio and trying to maximize benefits are important considerations. The possibility of benefits for family is not included; individuals should contact the Social Security Administration if they have questions about their personal situation.

Sources

  1. Fortune.com, July 15, 2021
  2. SeniorsLeague.org, May 12, 2021
  3. InvestmentNews.com, July 13, 2021
  4. SSA.gov, June 2021
  5. SHRM.org, June 2021
  6. FinancialAdvisorIQ.com, July 19, 2021
  7. https://am.jpmorgan.com/us/en/asset-management/protected/adv/insights/retirement-insights/guide-to-retirement/

The forecasts for Social Security benefits are based on assumptions, subject to revision without notice, and may not materialize.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Could Social Security Really Go Away?

· May 1, 2019 · Retirement, Social Security · No Comments

Social security card and American money dollar bills

That may be unlikely, but the program does face financial challenges.

Will Social Security run out of money in the 2030s?

You may have heard warnings about this dire scenario coming true. These warnings, however, assume that no action will be taken to address Social Security’s financial challenges between now and then.

It is true that Social Security is being strained by a gradual demographic shift.

The Census Bureau says that in 2035, America will have more senior citizens than children for the first time. In that year, 21% of us will be age 65 or older. (1)

As this shift occurs, the ratio of workers to retirees is also changing.

There were three working adults for every Social Security recipient in 1995. The ratio is projected to be 2.2 to 1 in 2035. (2)

Since Social Security is largely funded with payroll taxes, this presents a major dilemma.

Social Security may soon pay out more money than it takes in.

That has not happened since 1982. This could become a “new normal” given the above-mentioned population and labor force changes. (3)

When you read a sentence stating, “Social Security could run out of money by 2035,” it is really referring to the potential depletion of the Social Security Administration’s Old Age, Survivors, and Disability Insurance (OASDI) trust funds – the twin trust funds from which monthly retiree and disability payments are disbursed. Should Social Security’s net cash outflow continue unchecked, these trust funds may actually be exhausted around that time. (4)

Social Security is currently authorized to pay full benefits to retirees through the mid-2030s. If its shortfall continues, it will have to ask Congress for greater spending authority in order to sustain benefit payments to meet retiree expectations. (4)

What if Congress fails to address Social Security’s cash flow problem?

If no action is taken, Social Security could elect to reduce retirement benefits at some point in the future. Its board of trustees notes one option in its latest annual report: benefits could be cut by 21%. That could help payouts continue steadily through 2092. (2)

No one wants to see benefits cut, so what might Congress do to address the crisis?

A few ideas have emerged.

  1. Expose all wages to the Social Security tax or increase it at certain levels. Right now, the Social Security tax only applies to income below $132,900. Lifting this wage cap on the tax or boosting the tax above a particular income threshold would bring Social Security more revenue, specifically from higher-earning Americans. (5)
  2. Raise Social Security’s full retirement age (FRA). This is the age when people become eligible to receive unreduced retirement benefits. The Social Security reforms passed in 1983 have gradually increased the FRA from 65 to 67.5
  3. Calculate COLAs differently. Social Security could figure its cost-of-living adjustments (COLAs) using the “chained” version of the Consumer Price Index, which some economists believe more accurately measures inflation than the standard CPI. Its COLAs could be smaller as a result. (5)

Social Security could be restructured in the coming decades.

Significant reforms may or may not fix its revenue problem. In the future, Social Security might not be able to offer retirees exactly what it does now, and with that in mind, you might want to reevaluate your potential sources of retirement income today.

Sources

  1. denverpost.com/2019/03/01/ageism-colorado-tight-labor-market/
  2. fool.com/retirement/2018/09/29/social-securitys-fast-facts-and-figures-report-hig.aspx
  3. fool.com/retirement/2019/03/03/why-2019-is-the-social-security-year-weve-all-fear.aspx
  4. taxfoundation.org/social-security-deficit/
  5. morningstar.com/articles/918591/will-the-big-social-security-fix-include-expansion.html

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

4 Important Questions You’ll Need to Answer Before Claiming Social Security

· February 4, 2019 · Financial Planning, Retirement, Social Security · One Comment

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Whether you want to leave work at 62, 67, or 70, claiming the retirement benefits you are entitled to by federal law is no casual decision. You will want to consider a few key factors first.

1. How long do you think you will live?

If you have a feeling you will live into your nineties, for example, it may be better to claim later. If you start receiving Social Security benefits at or after Full Retirement Age (which varies from age 66-67 for those born in 1943 or later), your monthly benefit will be larger than if you had claimed at 62. If you file for benefits at FRA or later, chances are you probably a) worked into your mid-sixties, b) are in fairly good health, c) have sizable retirement savings. (1)

If you sense you might not live into your eighties or you really need retirement income, then claiming at or close to 62 might make more sense. If you have an average lifespan, you will, theoretically, receive the average amount of lifetime benefits regardless of when you claim them; the choice comes down to more lifetime payments that are smaller or fewer lifetime payments that are larger. For the record, Social Security’s actuaries project the average 65-year-old man living 84.3 years and the average 65-year-old woman living 86.7 years. (2)

2. Will you keep working?

You might not want to work too much, for earning too much income can result in your Social Security being withheld or taxed.

Prior to Full Retirement Age, your benefits may be lessened if your income tops certain limits. In 2018, if you are 62-65 and receive Social Security, $1 of your benefits will be withheld for every $2 that you earn above $17,040. If you receive Social Security and turn 66 later this year, then $1 of your benefits will be withheld for every $3 that you earn above $45,360. (3)

Social Security income may also be taxed above the program’s “combined income” threshold. (“Combined income” = adjusted gross income + non-taxable interest + 50% of Social Security benefits.) Single filers who have combined incomes from $25,000-34,000 may have to pay federal income tax on up to 50% of their Social Security benefits, and that also applies to joint filers with combined incomes of $32,000-44,000. Single filers with combined incomes above $34,000 and joint filers whose combined incomes surpass $44,000 may have to pay federal income tax on up to 85% of their Social Security benefits. (3)

3. When does your spouse want to file?

Timing does matter, especially for two-income couples. If the lower-earning spouse collects Social Security benefits first, and then the higher-earning spouse collects them later, that may result in greater lifetime benefits for the household. (4)

4. How much in benefits might be coming your way?

Visit ssa.gov to find out, and keep in mind that Social Security calculates your monthly benefit using a formula based on your 35 highest-earning years. If you have worked for less than 35 years, Social Security fills in the “blank years” with zeros. If you have, say, just 33 years of work experience, working another couple of years might translate to slightly higher Social Security income. (1)

Your claiming decision may be one of the major financial decisions of your life. Your choices should be evaluated years in advance, with insight from the financial professional who has helped you plan for retirement.

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▲ Maximizing Social Security benefits

The age at which one claims Social Security greatly affects the amount of benefit received. Key claiming ages are 62, full retirement age (FRA is currently 66 and 4 months for today’s 62-year-olds) and 70, as shown in the row of ages in the middle of the slide. The top three graphs show the three most common ages an individual is likely to claim and the monthly benefit he or she would receive at those ages. Claiming at the latest age (70) provides the highest monthly amount but delays receipt of the benefit for 8 years. Claiming at Full Retirement Age, 66 and 4 months, or 62 years old provides lesser amounts at earlier ages. The grey shading between the bar charts represents the ages at which waiting until a later claim age results in greater cumulative benefits than the earlier age. This is called the breakeven age. The breakeven age between taking benefits at age 62 and FRA is age 76 and between FRA and 70 is 80. Not shown is the breakeven between 62 and 70, which is 79 (78 and 6 months). Along the bottom of the page, the percentages show the probability that a man, woman or one member of a married couple currently age 62 will reach the specified ages. Comparing these percentages against the breakeven ages will help a beneficiary make an informed decision about when to claim Social Security if maximizing the cumulative benefit received is a primary goal. Note that while the benefits shown are for a high-income earner who maxes out their Social Security taxes each year (income of $128,700 in 2018), the breakeven ages would hold true for those at other income levels.

Sources

  1. fool.com/investing/2018/07/07/4-frequently-asked-social-security-questions.aspx
  2. ssa.gov/planners/lifeexpectancy.html
  3. blackrock.com/investing/literature/investor-education/social-security-retirement-benefits-quick-reference-one-pager-va-us.pdf
  4. thebalance.com/social-security-for-married-couples-2389042
  5. https://am.jpmorgan.com/us/en/asset-management/gim/protected/adv/insights/guide-to-retirement

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.