Cheryl Chapman Henderson, LLC

Can I Put That In My IRA/Qualified Plan?

“Here are five investments that cannot be used inside IRAs and other retirement plans.”

Traditional and Roth IRAs aren’t limited to the narrow selection of investments that are typically offered inside employer-sponsored retirement plans, like 401(k) or 403(b) plans. Most investments are permitted inside an IRA, including stocks, bonds, mutual funds, annuities, unit investment trusts (UITs), exchange-traded funds (ETFs) and even real estate.

Investopedia’s recent article, “5 Investments You Can't Hold In An IRA/Qualified Plan,” says that even qualified plans are allowed to hold almost any type of security, but mutual funds, annuities, and company stock are typically the three primary vehicles used in these plans. There are some limitations on the types of investments that can be held inside retirement accounts. Let’s look at them.

Life Insurance. No type of life insurance contract typically can be titled as an IRA or qualified plan or be held in such an account or plan. Qualified plans have one exception to this rule, known as the incidental benefit rule. It says that qualified plans can purchase a small amount of life insurance for a given plan participant. However, because the primary purpose of the plan is to provide retirement benefits, the amount of the death benefit must qualify as "incidental" compared to the plan balance.

Types of Derivative Positions. Any type of derivative trade that has an unlimited or undefined risk, like naked call writing or ratio spreads, is prohibited.

Antiques/Collectibles. Stamps, furniture, porcelain, antique silverware, baseball cards, comics, works of art, gems and jewelry and fine wine can’t be held in these accounts.

Real Estate for Personal Use. You can hold real estate directly inside an IRA, but the IRA owner can’t benefit directly from the property in any sense, such as receiving rental income or living in the property. Therefore, you can’t purchase your house with IRA or retirement plan money. Real estate can be held in an IRA, provided that the investments aren’t in your personal name. The real estate expenses and income must be paid and deposited into your IRA. The IRA also cannot purchase your primary residence or any other vacation home (providing an indirect benefit).

In addition, the IRA can’t buy or sell property already owned by you or any other disqualified person, for example, your spouse, children or their spouses, parents, grandparents, and great-grandparents, grandchildren and great-grandchildren. Note that many IRA custodians can’t facilitate the direct ownership of real estate or oil and gas interests, and those that do often charge annual administration fees that are much higher than usual fees.

Most Coins. As with all other types of collectibles, most coins made of gold or any other precious metal aren’t allowed.  However, there are some exceptions. Some allowed coins include American Eagle coins (proof and non-proof), American Gold Buffalo coins (non-proof), American Silver Eagle (proof and non-proof), Austrian Gold Philharmonics coins, and Canadian Maple Leaf coins. To be allowed to be held inside an IRA, the coins must be very pure in their mineral content and not seen as a collector's coin.

The list of investments that may be held in an IRA is far larger than the list of investments that are not permitted. However, you need to know what can and cannot be included, if you wish to venture away from what most people keep in their IRAs: mutual funds.

Reference: Investopedia (March 31, 2018) “5 Investments You Can't Hold In An IRA/Qualified Plan”

Should You Be Concern About Your Social Security?

“Low-income adults’ concerns have receded from post-recession highs.”

A recent Gallup poll found that 51% of pre-retirement American adults age 50 to 64 are very concerned about the Social Security system.

On the other hand, as reported in Think Advisor’s article, “Older Pre-Retirees Worry a Lot About Social Security: Gallup,” just a third of young adults expressed a great deal of concern about the system.

Gallup conducted telephone interviews in March with a sample of about 1,000 adults living in all 50 states and DC. The data showed that 44% of Americans worry a “great deal” about Social Security, 28% worry a “fair amount,” 17% “only a little” and 10% “not at all.” Social Security ranked in the middle of a list of 15 issues or social problems the respondents were asked to rate in the poll. The survey participants said they were most worried about the availability and affordability of healthcare.

Gallup says the percentage of older pre-retirees in the survey who worried a great deal about the Social Security system, had decreased from the 59% record highs recorded in the three-year rolling averages for 2009 to 2011 and 2011 to 2013.

Younger adults in the survey also recorded slightly lower averages than in recent years, and 11 percentage points lower from 2007. Concern about Social Security has also subsided with retirement-aged Americans. Roughly 46% express a great deal of worry—down from an average of 56% for 2010 to 2012.

For respondents in the 30-to-49 age bracket, the percentage expressing a lot of concern about Social Security has remained steady in the range of 46% to 52% since 2005, according to Gallup. In the current poll, 49% said they worried a great deal.

It’s no surprise that majorities of Americans with annual incomes of $30,000 or less have consistently reported a great deal of concern about the Social Security system since 2005. That peaked at 62% as the average for 2009 to 2011. The current 53% who worried a great deal is about the same as the low recorded in the 2007 to 2009 average.

Worries among higher-earning groups have remained steady, with a range of 47% to 53% between 2005 and 2018 for respondents with annual household incomes between $30,000 and $74,999, and 40% to 44% for those with annual incomes of $75,000 or more.

Although Americans’ level of worry about Social Security has lessened, perhaps they ought to be worrying more. Gallup said that no politician wants to tackle changes to Social Security to ensure that it continues to provide benefits. Efforts by both the Bush and Obama administrations were not successful. The program’s financial solvency has long-term sustainability challenges, that does need to be addressed.

Reference: Think Advisor (April 9, 2018) “Older Pre-Retirees Worry a Lot About Social Security: Gallup”

OK, Do I Claim My Social Security Benefits Now?

“Deciding to take benefits that early is only advantageous for limited situations, according to financial advisors.”

If you're getting ready to retire, you're probably already thinking about when to claim your Social Security benefits. Of course, when you turn 62, you’re eligible to file. However, grabbing benefits at the first opportunity will reduce your monthly paychecks and overall lifetime earnings. CNBC explained this in its recent article, “Here's when it makes sense to claim Social Security early.”

However, if you can wait and delay claiming benefits until your full retirement age (either 66 or 67, depending on when you were born), you’ll receive 100% of the benefit available to you based on your personal work record. If you wait until age 70, your retirement benefits will be even more. Delaying past full retirement age, allows your benefits to grow by roughly 8% per year until you reach that age. Therefore, waiting until 70 could increase your benefit amount by to 132%. As a result, most experts recommend that you hold off on claiming for as long as you can. That can be a gamble.

The bet is that you’ll live longer and get more money. The government is asking you to make a calculated risk decision on what you had been mandated to pay into while taking a risk on the back end.

Taking Social Security at 62 may be wise, if you're single and terminally ill, and know for a fact that you’re not going to live very long.  However, in most other situations, it doesn't make sense to claim early and take that permanent reduction. If you're married, claiming early could decrease the number of benefits your spouse will have, after you're gone. The spouse’s survivor benefit is permanent.

Survivor benefits are determined by the age a person dies and the amount of Social Security credits they’ve accrued. If you wait to claim benefits, you’ll have a greater number of credits, and thus a larger benefit to pass on when you die. How much of that amount survivors can access, is based on when they claim the benefit. A person can file for widow or widower benefits starting at age 60. However, that benefit amount will be reduced. If a surviving spouse waits until his full retirement age, he is eligible to receive 100% of their spouse's benefit amount.

Those eligible for survivor benefits can decide between claiming those funds and their own retirement benefits if they are eligible for them. That can include taking the survivor benefit while letting their own benefit grow up to age 70. Those born before January 2, 1954, and who’ve reached full retirement age, can opt to receive their spousal benefit and delay taking their own retirement benefit. That would allow their retirement benefit to continue to grow. However, if you’re born after that date, you don’t have that option. You must choose between one benefit or the other.

Delaying will also help you with annual cost-of-living adjustments (COLA), which will be based on that higher benefit amount. This decision can be complicated, so speak with an estate planning attorney.

Reference: CNBC (March 10, 2018) “Here's when it makes sense to claim Social Security early”

 

How Do I Maximize My HSA For Retirement?

“Aging creates unique circumstances for those with health savings accounts (HSA). Generally, the impact of approaching age 65 is to limit the ability to contribute to your HSA.”

While hitting 65 can limit HSA contributions, there are some ways to squeeze every dollar into your HSA even as you approach retirement age.

A recent healthsavings.com article, “Approaching Retirement? Five Tips to Maximize Your Investment HSA,” explains that it’s pretty clear healthcare costs in retirement will be one of the eight largest expenses. Fidelity estimates that the average couple will need $275,000 in today’s dollars to cover health care expenses throughout retirement. However, it’s key to remember that your HSA (Health Savings Accounts) can be used to pay for Medicare parts B and D, long-term care premiums, long-term care, and normal medical, vision, and dental expenses in retirement.

Both you and your spouse should have your own HSA, the year you turn 55. This lets you get all the catch-up contributions you deserve. IRS regulations require that each HSA catch-up contribution is associated with one Social Security number, so you and your spouse each need an HSA to max out your contributions. It’s not important which spouse has more. This is because you can each spend your HSA dollars to pay the other’s eligible medical expenses.

Even if you’re prohibited from contributing to your HSA because you’re enrolled in Medicare, you can still grow that account by moving it to an investment-focused HSA. There may be a transfer fee to move your money to the new HSA, but the receiving HSA may be willing to offset that transfer out fee. Just ask.

In many married couples, the breadwinner and the insured party is often the older of the two spouses and that older spouse will usually enroll in Medicare as soon as possible. However, in some instances, he or she continues to carry the family health care policy at work to cover his or her spouse. This can be an opportunity because the spouse has family coverage, and in the eyes of the IRS, can make the family contribution to her, or his, HSA. The older spouse who’s on Medicare can’t contribute to an HSA.  However, as a family, they can make the family contribution to the HSA and one catch up amount of $1000 (assuming the contributing spouse is 55 or older). If both spouses have their own HSA’s for catch up purposes, it’s easy to shift who makes the contribution from the spouse covered by Medicare to the spouse who is primarily covered only by the high deductible. However, it can’t be payroll deducted from the ineligible spouses’ income, so you may sacrifice the FICA savings.

If you are employed and covered by your employer’s health care plan, you may be able to delay enrollment in Medicare. If you’re currently receiving any kind of Social Security or railroad retirement benefits, you’re automatically enrolled in Medicare Part A, so this won’t apply to you.

Postponing your enrollment in Medicare and your acceptance of Social Security retirement benefits lets you extend your eligibility to make contributions to your HSA.  However, you must be employed and covered by health insurance through your current employer. Your insurance must also be what is known as creditable coverage. In addition, if you postpone your Medicare enrollment, there are some specific timing requirements you must meet when you do a transition from your employer plan to Medicare.

Reference: healthsavings.com (not dated) “Approaching Retirement? Five Tips to Maximize Your Investment HSA”

Can You Believe That Half of Americans Have Saved Nothing for Retirement?

“Nearly half of Americans have less than $10,000 stashed away for retirement, according to a report by GoBankingRates.”

For half of us, the serious lack of retirement planning, along with longer life expectancies has wreaked havoc with retirement dreams.

CNBC’s recent article, “42% of Americans are at risk of retiring broke,” notes that retirement may be more fantasy than reality for many individuals in America.

Roughly 42% of Americans have fewer than $10,000 saved for when they retire. That’s according to a study by GoBankingRates released recently.

From 2016 to 2017, the percentage of Americans with $0 saved increased. However, this year, it dropped significantly.

The percentage of adults with nothing saved has gone down. However, the percentage of those with $300,000 or more in a retirement fund has increased.

The top reason that most people cited for not saving, was because they simply didn't earn enough to save. The next reason given was that they were already struggling to pay bills, according to GoBankingRates. The personal finance site interviewed more than 1,000 adults online in February.

For those with little or no savings, a significant lack of proper investment income and planning and the fact they’re expected to live longer lives has made the concept of retiring practically impossible.

Millennials are most likely to have fewer than $10,000 saved, but older Americans are also becoming steadily more negative about their future economic prospects. This is according to another study by United Income, a start-up that is applying big-data analysis to financial planning.

Reference: CNBC (March 6, 2018) “42% of Americans are at risk of retiring broke”

Survey Shows Gen X Americans Could Do More and Better Retirement Planning

“Here are three challenges that scare Gen Xers with advisors, a lot more than the ability to cover basic post-retirement expenses.”

Researchers at the Insured Retirement Institute (IRI) have found a possible Gen X knowledge gap in a recent online survey. The sample included 802 Gen Xers—Americans who are ages 36 to 55.

Think Advisor’s recent article, “These 3 Threats Scare Gen Xers More Than Basic Retirement Costs: IRI” explains that the survey aimed to find out how Gen Xers are handling retirement planning. The analysts who summarized Gen Xers’ approach to retirement planning said “They’re (mostly) doing it wrong.”

The results showed that only 20% of Gen Xers have talked to a financial advisor, that only one-third of Gen Xers have tried to figure out what they’d need to have saved to retire and that only 23% of the Gen Xers who have tried to save for retirement, have more than $250,000 in retirement savings. However, the research shows that roughly 58% of the Gen Xers are somewhat or very confident they will have enough cash to cover basic expenses in retirement.

The survey didn’t break down most of the results by income or asset level, but they did look at the use and lack of use of a financial professional. Participants with financial professionals might be the ones who have more overall financial flexibility, with 82% of the Gen Xers with financial advisors responding that they’d discussed retirement planning, and 61% said the advisors had discussed investing. Those discussions may have contributed to 87% of the Gen Xers with advisors saying they were confident about having enough income to cover their basic expenses in retirement. However, even the Gen Xers with advisors said they had grave doubts about their ability to handle other major financial challenges.

Here are some of the other findings:

1. Covering long-term care (LTC) costs. Just 63% of the Gen Xers with advisors said they were somewhat or very confident about having enough money to pay their long-term care expenses. It looks like advisors hadn’t done much to help Gen Xer clients with that concern. Only 9% had talked about planning for cognitive decline, like dementia or Alzheimer’s. Only 29% had talked to their clients about insurance.
2. Addressing parents’ LTC needs. A little over half of the Gen Xers with advisors said they were somewhat or very confident about being able to assist with their parents’ LTC bills. The survey didn’t ask Gen Xers how many had talked about that with their advisors.
3. Paying children’s college bills. Many experts in the field suggest that Gen Xers should prioritize their retirement planning and leave the children’s college bills second. However, Gen X parents say the money to put their children through college must come from somewhere. Only 51% of the Gen Xers with advisors said they were somewhat or very confident they’ll have enough money to defray their children’s higher education expenses.

Reference: Think Advisor (March 24, 2018) “These 3 Threats Scare Gen Xers More Than Basic Retirement Costs: IRI”

Can You Retire in 2018?

“The decision to retire, isn't one to be taken lightly.”

If you're thinking that 2018 will be the year you bring your career to a close, be sure to consider these key items first, says The Motley Fool in the recent article, “Should You Retire in 2018?”

How are my savings? While there’s no magic number, the general rule says you should try to have 10 times your ending salary saved before you retire. Most retirees need around 80% of their former income to live comfortably. One savings tactic is to contribute to a 401(k). If you stay on the job a few years longer and max out during that time, you'll have extra cash in retirement and avoid tapping your nest egg sooner.

Full Retirement Age for Social Security? If you're planning to fall back on Social Security benefits in retirement, you'll need to think about whether retiring in 2018 will hurt you from a Social Security standpoint.

If you wait until your full retirement age to take benefits, you'll collect the exact amount you're entitled to, based on your work history without a reduction or boost.  However, if you file for benefits early, you'll lower your payments by a certain percentage for each year you collect them before full retirement age.

If you delay taking Social Security past full retirement age, you'll accrue delayed retirement credits that give your benefits an annual 8% boost.

If you're thinking of retiring this year, calculate how your age might affect your Social Security payments, and make a smart decision based on that calculation.

Plans in place? While retirement is often thought of as a time to relax, travel and enjoy life, many seniors find themselves bored, restless and even depressed. Before you decide to retire this year, consider how you'll actually spend your time once you no longer have a job.

Retirement can be a fulfilling period of life, if you’re emotionally and financially prepared. But if that isn't the case, you should keep working until you have things mapped out, especially if you like your job and are able to keep doing it for a while.

Reference: The Motley Fool (January 7, 2018) “Should You Retire in 2018?”

Understanding Long-Term Care Planning

“Unless you're very rich or very poor, you should be looking into all of the long-term care possibilities out there. Because of the costs and complexity involved, the choice isn't easy. But it is necessary.”

There is no easy way to plan for long-term-care expenses. According to the U.S. Department of Health and Human Services, 70% of those age 65 and over will need some sort of long-term care. Paying out of pocket won’t be possible for most, because the median annual cost of a private nursing room is $97,455.

Kiplinger notes, in its article, “The Impossible Reality of Long-Term Care Planning,” that the long-term care insurance industry is in flux, with many companies closing this part of their business because claims are much higher than expected.

While there’s no perfect, easy solution, you can consider long-term care insurance. The other option is to be very wealthy and pay out of pocket or try to qualify for Medicaid.

Most of us have a financial situation that could be ruined by the average long-term care event. The best bet is to transfer some of the risk to an insurance company. The issue then becomes determining the right amount. Many insurance agents recommend a monthly benefit that is aligned with the average facility cost. But given the high cost of long-term care insurance, it should be used to fill a gap, not cover the entire expense. Don’t reach to buy a policy you can barely afford today, because premiums can skyrocket.

As far as the type of policy, traditional long-term care insurance is the easiest to understand and the type everyone bought until a few years ago. While you’re covering a big risk from both a likelihood of need and a dollar perspective, it’s expensive.

The life insurance industry recently introduced a hybrid universal life insurance with long-term care riders. This is permanent universal insurance with flexible premiums. “Riders” are like guarantees. In effect, these are policies with set periods for the premium. You can pay for them all up-front or over time. Premiums are guaranteed not to rise, and if you don’t use the insurance, it will pass to the next generation as a death benefit.  However, the death benefits are lower than they would be without the long-term care part, and the monthly benefit amounts are typically lower than they would be for the same amount in a traditional policy. Some will take this tradeoff for the certainty of knowing the amount of their premiums.

This insurance isn’t easy to get: there’s a standard life insurance exam plus a memory test. If you have health or cognitive issues, an annuity with a long-term-care rider may be the only option.

Reference: Kiplinger (January 2, 2018) “The Impossible Reality of Long-Term Care Planning”

Understand the Complexities of Remarrying Later in Life

“Remarrying later in life can create several complex financial, legal, and emotional matters that should be addressed.”

About a third of U.S. residents ages 15 and older have been married at least twice, according to the U.S. Census Bureau, and remarriage among Americans ages 55 and older is increasing. At the same time, younger people are becoming less likely to have remarried.

The Flagstaff (AZ) Business News recently published an article, “Financial Issues to Consider in Remarriages,” which suggests that you should be candid about your financial situation. Couples who are marrying for the second (or third) time frequently have financial baggage. You should eliminate issues later in the marriage by having open and honest discussions about assets, debts and obligations. Think about the following questions to get the talks started:

• What financial obligations are we bringing to our marriage?
• How are our credit scores?
• Do we have financial obligations (alimony, child support) to our ex-spouse(s)?
• Do we want to pool our finances?
• Where will we live?
• How will our marriage impact college financial aid for our children from previous marriages or relationships?

 It is also important to update life insurance, medical directives and beneficiary designations. If you don’t do this and you (or your spouse) die, part of your estate could go to a previous spouse. If you and your spouse have living wills, health care powers of attorney or healthcare directives, review them with your estate planning attorney to ensure that these documents reflect your current wishes.

You should also consider how remarriage affects your retirement planning, like the benefits your partner may be receiving. These can include a deceased spouse’s social security benefits or pension payments.

Discuss estate planning with your attorney because subsequent marriages can impact estate plans—a common concern among older couples. An older couple is more likely than younger newlyweds to bring property and other valuables into the relationship. They often may want these family valuables to go to their own children from a prior marriage.

Beginning again with a new partner is exciting, even when the new marriage introduces complex financial considerations. Talking to each other, as always, is the key to long-term success.

Reference: Flagstaff (AZ) Business News (October 26, 2017) “Financial Issues to Consider in Remarriages”

When Do I Start Succession Planning for My Business? How About Yesterday?

“The day you open for business is not a minute too soon to think about your long-term exit strategy–a written plan, including provisions for increasing the value of your business at least five to 10 years ahead of your exit date.”

As a by-product of succession planning, you get a template for running a better business. It’s beneficial to start these preparations right away.

Springfield (MO) Business Journal’s recent article, “Starting a business? Plan your exit now,” advises that you begin with creating a culture of success with your employees, especially the key people. That means fostering an ownership mentality, so they see their critical role in the company’s long-term success and their role in helping that to continue in the future, long and short term.

One of the first steps is to identify who will take over, whether that’s a partner, family member, employee or a purchaser from the outside. For death-of-owner planning, you should draft a buy-sell agreement with an experienced attorney. A buy-sell agreement will include a purchase price formula. That formula needs to be revisited as conditions change.

 The next step is to decide how the buy-sell agreement will be funded. A common option is life insurance. The business owner is the insured, and the successor-owner is the beneficiary. This policy can provide necessary and immediate cash for the successor-owner to purchase the business from a surviving spouse.

If you want an employee or family member to take control at your retirement or death, start with their training and/or experience now in order to get them adequately prepared. You may also consider “stay-put” agreements to keep key managers and employees around to help with the transition to new ownership. You may want to consider a “stay bonus”, in addition to regular pay as an incentive.

Every “death-of-owner” planning scenario also applies to exit plans from the sale of the business. Here are five other contingency planning items:

1. Disability, illness or injury of the owner. With disability/income replacement insurance for the owner, think about business overhead expense insurance. That insurance helps make sure the bills are paid and the doors stay open while you’re out.
2. Death or disability of a key employee. Consider the expense of replacing a top manager or salesperson temporarily or permanently. What revenue would potentially be lost during the transition? Look into key-person life insurance and/or key-person disability insurance.
3. Resignation of a key employee. With an executive bonus plan, a “golden handcuff” can help. One way is to contribute to a cash-value life insurance policy on behalf of the employee. The life insurance component gives the employee’s family important financial protection if she dies, and the cash value can supplement retirement savings one day, if she does not die. This will let the employee see how much she means to the business. Vesting terms in a written agreement will also make the program even stronger, because if she departs before the vesting period is complete, she’ll lose some or all the benefits.
4. Commercial property and casualty insurance. These policies can include business continuation provisions to cover expenses and payroll during any downtime after a catastrophe.
5. Estate planning. From both the perspective of your family and your business, review your estate plan with your attorney to be certain you’ve addressed all aspects of your plan: estate tax and gift tax, probate avoidance, your will, trusts, powers of attorney and any other estate planning documents.

Start your planning now to address potential pitfalls with your business to experience a smooth, successful business transition.

Reference: Springfield (MO) Business Journal (October 2, 2017) “Starting a business? Plan your exit now”