Michigan Estate Planning Blog

Tough Retirement Decisions for Small Business Owners

Talk about being kicked when you’re already down. That’s the feeling many small business owners have as they ponder retirement in these tough financial times. Surviving the recession is one thing, but retiring in one seems next to impossible. The Wall Street Journal considered this topic in a recent article aptly titled “'The Economy Stole My Retirement.'” If you are a small business owner on the one hand – a role that requires flexibility and ingenuity – and a baby-boomer on the other, then this recession has been more than a case of terrible timing. No, it’s thrust you into “business purgatory.” Do you find yourself with one foot in management and the other foot (or maybe just that big toe) in the golden sands of retirement? A baby boomer who is a small business owner faces a very tough call right now. Should he or she sell for the best offer today, which is generally the low-ball offer, or hold out for some future value which more accurately reflects what the business is truly worth? A tough call, indeed. For the owners of small businesses and the heads of family businesses, make no mistake about the difficulty of your position. It’s impossible to foretell the future, but since you already know what is most valuable to you (your family and your business), take the time to carefully weigh your options and seek appropriate professional counsel.

Reference: The Wall Street
Journal (September 12, 2012) “'The Economy Stole My Retirement'”

Couples Over 60: Marriage or Cohabitation?

More seniors today are choosing to cohabitate instead of walking down the aisle, and the consensus is not that the institution of marriage is lost as we age – it’s more of a financial decision to protect one’s retirement income. Regardless, whether you (or a loved one) elect to marry or to cohabitate, you really ought to carefully weigh the consequences and seek appropriate counsel. The dilemma between marriage and simple cohabitation (truthfully, it’s not so simple) was explored in a recent Yahoo! article by way of Bankrate.com. The article, titled “Financial pros and cons of shacking up after 60,” illustrates that there is much to think about, breaking many of the most important financial decisions into stages. Essentially, there are important ramifications either way when it comes to retirement income, social security, and the medical care available through Medicare or Medicaid. And then there are the greater concerns of what is to happen to your respective families: whether they remain separate or have become joined, what inheritances to leave, or even how to ensure the well-being of the survivor. Whether or not you choose to marry at an older age, make sure you have carefully considered the consequences of your decisions and then plan accordingly.

Reference: Bankrate, Inc. via Yahoo! Finance (August 17, 2012) “Financial pros and cons of shacking up after 60”

Retirement Cash Flow and Retirement Planning

Most married couples want to ensure that all of their resources are available to provide for the surviving spouse, upon the first death. However, without careful retirement planning now, surviving spouses could find themselves in a “cash flow” pinch just when they need income most. Estate planning is a process with many moving parts. While much focus is given to saving estate taxes, avoiding probate, and transferring wealth between generations, failing to incorporate retirement planning can be hazardous to your wealth. This estate-planning dilemma was the centerpiece of a Kiplinger’s study recently featured in the Chicago Tribune. The article, titled “Retirement: An estate-planning pitfall,” brought to light the difficulty of lost income to surviving spouses. The first spouse’s passing often disrupts what the couple had always taken for granted financially – predictable cash flow. The article reviews sources of income impacted by this first death, including social security and pensions. As with all aspects of estate planning, it is crucial to understand the importance of getting competent counsel in advance. In fact, couples should investigate the impact of death on cash flow while both are alive in order to avoid unpleasant surprises later.

Reference: The Chicago Tribune (July 17, 2012) “Retirement: An estate-planning pitfall”

Expatriates Get A Tax Swat Upon Exit

As far as the IRS is concerned, permanently leaving the country is something on the order of dying, because the tax burden is the same. Here’s the deal: When you expatriate and renounce your US Citizenship, the IRS will treat you as though you sold all of your worldly assets at their fair market value the day before leaving. Consequence: The IRS will tax all such worldly assets as a “capital gain.” Accordingly, this tax event is known as the “exit tax.” There are certain exclusions, to include the cases involving dual-citizenship or expatriation before age 18.5. Why? Because in either case you wouldn’t qualify as a “covered expatriate.” Additionally, you can escape this taxation if you have an overall value of less than $651,000 of (supposed) income. Still, if you’re hoping to spend your golden years abroad, then it’s unlikely you will escape the grasp of the IRS by the above exclusions. Nevertheless, planning just might limit how much the IRS can take. If nothing else, this kind of complete appraisal of your property is consistent with your overall estate planning. So, for those considering expatriation even remotely, why not kill two birds with one stone and make a full inventory of your assets right now. In addition, some strategic gifting may help lower the amount of your assets subject to the “exit tax” should you elect to pull the proverbial trigger. For more background reading on this subject, consult a recent article in Forbes titled Tax Expatriates: We'll Always Have Paris.

Reference: Forbes (May 1, 2012) “Tax Expatriates: We'll Always Have Paris”

Small Business Owner Retirement Perspectives

traditional 401(k)s. They think they are saving taxes. Small business owners, by and large, have a hard time thinking beyond their business. It is a significant part of their very lives. If you are a small business owner, now may be the time to start thinking of your business as its own retirement vehicle, at least according to a recent guest columnist over at Forbes. For retirement planning, a business owner typically has to take out of the business what would otherwise be capital for growth. You’re taking it out to put into a tax advantaged plan like a 401k, hoping it will grow there enough to make up for the taxes to be paid later. In addition, you are doing so in the belief that you’ll be in a lower tax bracket when you call upon those funds later on. But what are the returns on that account? It may be that a properly capitalized company will give far greater returns. According to the Forbes article, a small business owner has to exist in a couple capacities, and the self that is an “individual” cannot be eclipsed by the self that is the “business owner,” nor the other way around. Ideally, perhaps, they can work in a synergy. It is a risky strategy, especially for those nearing retirement, but it may be worth looking into the original article’s numbers.

Reference: Forbes (January 25, 2012) “Fund Your Business Before You Stuff  Retirement Accounts”

ESTATE PLANNING / SPECIAL NEEDS

Coping with the physical, emotional or developmental disabilities of a special needs child is part of the daily life of many parents. Then there is the added financial burden of providing care and security for all family members, both today and in the future. Parents are encouraged to call upon the trained expertise of financial and legal advisors. Last week, The Times Herald ran an excellent brief article highlighting some of the important aspects of Special Needs Planning, to include: • Retirement and Estate Planning for the parents. • Reviewing any beneficiary designations for life insurance, qualified retirement plans or annuities to ensure any inherited assets will not disqualify your special needs child from receiving vital federal benefits. • Consideration of establishing a Special Needs Trust to accumulate mange and disburse monies for any child with a disability. • Protecting the financial security of other family members – including college funds for other children in the family. If you are the parent of a special needs child, or know someone who is, I encourage you to visit the Special Needs Practice Center on our website. There you will find an abundance of information and resources, including our Free Report: Special People…Special Plans.

 

ELDER LAW / RETIREMENT CAREERS

In today’s economy, it seems that everything old is new again … albeit with a bit of a twist. Years ago, it was common for older couples – and frequently widows – to rent out rooms for extra income. Taking in boarders was a viable way to supplement income. Well, the idea is back, with a bit of a twist. As Baby Boomers face the cold, hard facts of retirement, they are increasingly changing the definition of the term to include at least some form of work. While you may not be ready to hang out a shingle on the front gate, “Rooms for Rent,” you might consider becoming a landlord. In fact, the venerable Wall Street Journal writes that it may be just the ticket, especially given the uncertain prospects for stocks and bonds and the meager interest rates on savings accounts. Think about it. It’s a buyer’s market now, so purchasing a multi-family home is more financially feasible. And, the trend toward the renter’s lifestyle is picking up steam. All this means you have a low cost of entry into a market that is expected to expand. Starting to make investment sense? Sure, it’s a career of sorts, but you also need to think of it as an investment. Weigh everything in the short term, including start-up and maintenance costs, as well as the marketability of the location you’re considering. But then also keep your long-term goals in mind, including appreciation and eventual sale. Buying in a depressed market, after all, is only a steal if that market bounces back. Finally, don’t overlook the possible danger of having all your eggs in one basket since being a live-in landlord will unite your home, equity, and employment, into one potentially risky asset. Like any retirement move, don’t make this one too quickly. Discuss your plans with a professional who can help you sort out the details, including how an investment rental property could affect your Social Security benefits. Remember, too, that this lifestyle may not suit you. In which case, you would be wise to explore other, more enjoyable options.

Reference: The Wall Street Journal Online (June19, 2011) “Want a job? Become a landlord.”

ELDER LAW / RETIREMENT CAREERS

In today’s economy, it seems that everything old is new again … albeit with a bit of a twist. Years ago, it was common for older couples – and frequently widows – to rent out rooms for extra income. Taking in boarders was a viable way to supplement income. Well, the idea is back, with a bit of a twist. As Baby Boomers face the cold, hard facts of retirement, they are increasingly changing the definition of the term to include at least some form of work. While you may not be ready to hang out a shingle on the front gate, “Rooms for Rent,” you might consider becoming a landlord. In fact, the venerable Wall Street Journal writes that it may be just the ticket, especially given the uncertain prospects for stocks and bonds and the meager interest rates on savings accounts. Think about it. It’s a buyer’s market now, so purchasing a multi-family home is more financially feasible. And, the trend toward the renter’s lifestyle is picking up steam. All this means you have a low cost of entry into a market that is expected to expand. Starting to make investment sense? Sure, it’s a career of sorts, but you also need to think of it as an investment. Weigh everything in the short term, including start-up and maintenance costs, as well as the marketability of the location you’re considering. But then also keep your long-term goals in mind, including appreciation and eventual sale. Buying in a depressed market, after all, is only a steal if that market bounces back. Finally, don’t overlook the possible danger of having all your eggs in one basket since being a live-in landlord will unite your home, equity, and employment, into one potentially risky asset. Like any retirement move, don’t make this one too quickly. Discuss your plans with a professional who can help you sort out the details, including how an investment rental property could affect your Social Security benefits. Remember, too, that this lifestyle may not suit you. In which case, you would be wise to explore other, more enjoyable options.

Reference: The Wall Street Journal Online (June19, 2011) “Want a job? Become a landlord.”

ELDER LAW / RETIREMENT CAREERS

If you are a Baby Boomer nearing retirement, you probably have a different concept of retirement than your parents. Retirement for you may not mean an extended vacation on some sunny shore, but rather a new phase of your working career. A phase that may, perhaps, bring more than just another paycheck, but a new sense of meaning to your life. Morningstar recently referred to this career transformation as the “encore career.” Of course, it’s not just the search for meaning that motivates Baby Boomers to pursue an encore career. As Morningstar points out, tough new economic realities have transformed career reinvention from a virtue into a necessity for millions of older Americans who aren’t ready to retire or simply can’t afford to quit working. Interestingly, though the job market looks fairly bleak today, some economists predict labor shortages in key social sector jobs. Barry Bluestone, an economist at Northeastern University in Boston, predicts that within the next eight years, there could be at least five million job vacancies in the U.S., nearly half of them in social sector jobs in education, health care, government and non-profit organization. Bluestone also predicts that Baby Boomers are going to be filling those jobs, "We're going to see a remarkable reshaping of our labor force. The rate of labor force participation by the 55-plus population is going to be much higher, and older workers will represent a much higher percentage of the overall workforce." The Morningstar article includes a table ranking Projected Encore Career Growth 2008-2018. You might want to check it out. I note that job growth is predicted to be particularly strong for teachers, nurses and other health care providers … and not so much for lawyers. Reference: Morningstar Advisors (June 6, 2011): Making Working Longer Worth It

ESTATE PLANNING / RETIREMENT

In this article, SmartMoney’s Catey Hill takes a look into the increasing trend of mobile retirements and luxury RV’s. The article briefly examines the market, citing increased sales in Class A gas motor homes (the luxury models) and industry analysts are explaining it by looking to the recently retiring generations who have the resources and inclination (they are the generation that grew up with “On The Road.”) Indeed, the median age for RV owners is 54. The article then explores the idea and motivations of those retirees, explaining all the amenities of a luxury RV – hardwood floors, brushed steel appliances, flat-screen TV’s, etc. – as well as the freedom of living on the road and possibilities like “glamping” (the unfortunate title for “glamorous camping”.) Link: http://www.smartmoney.com/retirement/planning/luxury-retirement-on-wheels-1306263018641/?link=SM_hp_ls4e From SmartMoney (May 24, 2011) “Luxury Retirement On Wheels”

ESTATE PLANNING / RETIREMENT PLANNING

If you were counting on tapping the equity in your home to help finance your retirement, you may have reason to worry. A recent issue of SmartMoney points out, “With home prices falling for nearly five years, many American must consider what to do with their homes should prices continue to collapse and the equity in their homes, if they are still lucky enough to have any, disappears completely.” If you are a Baby Boomer with an eye toward retirement, your plans may be taking quite a beating right now. Warnings about shortfalls in social security and Medicare, rising health care costs, and the prospect of higher taxes now combine with disappearing home equity. No wonder so many Boomers say they plan to work through their “retirement.” So, what do the experts say you should do with your home? Should you stay put and wait it out, hoping that home prices will eventually recover? Or should you bail out now, before you lose even more, and downsize? “The answer is that it depends on the individual situation,” says Nicholas Paleveda, an adjunct professor at the graduate tax program at Northeastern University. “If you have plenty of assets for retirement, there may be no reason to downsize. If you do not have sufficient assets for retirement, then selling your home to live in a smaller home may be appropriate.” Some options to consider include: • Multi-Generational Living. Think of The Waltons, with three generations living in one house. Multi-generational living was commonplace years ago, and is growing in popularity now. In fact the number of household comprising multiple generations jumped to 7.1 million, or 6.1% of all US households in 2010. Of course, things worked out well for The Waltons, but remember that was television … and even John Boy eventually moved out! • Pay Down the Mortgage. Depending upon your circumstances, it may be wise to pay down, or pay off, your mortgage before retirement to reduce your monthly expenses. • Downsize. In today’s market, it may actually make sense to sell your house, even if it is underwater, if you can purchase a smaller home at a particularly good price and low interest rate. The cost of paying off your current mortgage would effectively be added to the purchase price of your new, smaller home. In some instances, after the dust settles, you could still be money ahead in the long run. • Buy a Second Home Now. That may seem counter-intuitive, but if you have the means and can find a good price on a second or vacation home that will mesh well with your retirement needs, then you could basically lock in that price (and interest rate) now, and sell your primary home when the market recovers. Retirement planning has never been simple, and is even more complex in today’s economy. You are well-advised to seek qualified counsel before making any major moves involving your home Link: http://www.smartmoney.com/retirement/planning/realestate-nightmare-looms-for-retirees-1305648626178/ From Robert Powell via SmartMoney (May 17, 2010) “For Retirees, a Real Estate Nightmare Looms”

ESTATE PLANNING / RETIREMENT PLANNING

There are a number of good reasons that you might be eying your IRA as it sits there with years to go before you turn age 59-1/2. You could see it as potential, as rescue capital, or if you’re in a really good place you could see it as the start of an early retirement. Of course, there are a few good reasons for leaving it alone – heavy tax hits and penalties – and for that Forbes has recently offered some uncommon advice for withdrawing from your IRA early and penalty free. The general wisdom is to leave your IRA alone until age 59-1/2 or else pay a 10 percent penalty on withdrawals. But there are allowances for penalty-free distribution in the case of serious financial hardship, higher educational expenses, or the cost of a first home. What is far less known is the 72(t) exception for Substantially Equal Periodic Payments (SEPP). Essentially, the IRS regulations allow annuitization of your IRA, so you can receive distributions straight from your IRA by taking them as a series of “substantially equal periodic payments.” The payments, once initiated, act much like required minimum distributions in that you must take out an amount determined by your life expectancy (or the joint life expectancy of you and your beneficiary) and at regular intervals, at least annually. Once initiated, you must take these distributions for 5 years or until age 59-1/2. You can then reorganize your distribution pattern or hold off entirely until the actual required minimum distributions set in at age 70-1/2. The process, as you would imagine, is fairly complicated and that probably accounts for its relative under-use. To see it in action you can consult the original Forbes article, but even they found it simpler to reiterate the examples and information from the IRS’s FAQ. It is tricky, and perhaps a little risky, but it is at least an interesting tactic to bring to light, and may be a practical solution to your early-retirement plans.

Link: http://blogs.forbes.com/thebogleheadsview/2011/04/14/how-to-take-money-from-your-ira-early-without-a-penalty/

 From Forbes.com (April 14, 2011) “How to take money from your IRA early – without a penalty”

SMALL BUSINESS / RETIREMENT

If you’re over age 50, have substantial assets in your qualified retirement plan, and always dreamed of being your own boss, you are not alone. In fact, you may decide to join the growing number of baby boomers who are tapping their retirement savings for start-up capital on a new business. The Wall Street Journal, along with SmartMoney, recently discussed the trend, the possibilities, and the potentially dangerous risks involved. Here is the strategy, which the IRS called a Roll Over as Business Startup (ROBS). First, you create a legal corporation with its own 401(k) plan into which you can transfer all of your funds from a previous employer-held plan. With those funds, you can then invest the 401(k) into your new corporation in exchange for shares. What once was simply retirement money has thus become start-up capital. The problems with this approach are probably obvious: most start-ups fail, but if you fund your start-up with your retirement money then your retirement also goes down the drain. That is probably the biggest risk, but don’t discount the IRS. While this move is legal (if done properly), it does invite IRS scrutiny. This financing move has become popular enough to draw the attention o f the IRS, which has suggested that these kinds of rollovers “seek to exploit the generous tax benefits enjoyed by qualified retirement plans.” The agency has called for added scrutiny on firms that use them. Still, some financing firms like Guidant Financial have seen increases in this method (a 30% increase in the case of Guidant Financial, for example). David Nilssen, co-founder of Guidant Financial Group, Inc., says the IRS has never called thse kinds of rollovers non-compliant, only that it would watch firms funded by 401(k) rollovers more closely. To be sure, there are risks involved. But the profile of an entrepreneur is one of a risk-taker. And then there are other risks at play. Many baby boomers facing retirement simply are not prepared to stop working. That retirement nest egg may not be enough to finance a comfortable retirement, but it just might be enough to finance a second career as an entrepreneur, providing income that could make an eventual retirement that much happier. Link: http://blogs.wsj.com/in-charge/2011/04/06/tapping-retirement-savings-for-a-start-up/ From The Wall Street Journal Online – WSJ Blogs (April 6, 2011) “Tapping Retirement Savings for a Start-up”

ELDER LAW / RETIREMENT PLANNING

It’s no secret that “retirement” is a touchy subject nowadays. Costs are up, savings are down, and the public is generally pessimistic according to the 2011 Retirement Confidence Survey. As a recent SmartMoney article relates, one increasingly popular solution, although it might not be an easy one, is to escape domestic problems and costs by going global and retiring abroad. It’s hard to say just how many retirees are living offshore. They aren’t counted in the census, and many go to great pains to fly below the radar, but according to the Social Security Administration the number of retirees taking benefits overseas has risen 32% since 2002. Some end up in small French villages or other cultured corners, many more retire to exotic regions like Thailand, while still others fly south to warmer climes in South America, happy to endure the rainy seasons to live where they can stretch out their dollar in style. The potential pay-off is great, especially if you have a taste for tropical drinks, but there are a number of concerns too. Simply put, it’s an entirely different place. Moving out of the way of rising costs in the US may mean moving into the path of hurricanes, into entirely different cultural waters with conflicts you don’t understand, and a potential web of paperwork and legal technicalities. Be cautious of scams, particularly the yet-to-be-completed “development.” Investors have been known to abandon such projects, leaving an incomplete, insolvent, or undersold development that may not fulfill the promises of the pamphlet. The Smart Money article is quite lengthy and detailed. If an off-shore retirement destination is enticing you, I suggest reading this – and many others. Due diligence is the key to a successful off-shore transition. Link: http://www.smartmoney.com/personal-finance/retirement/retire-abroad-golden-years-go-global-1299780968587/ From SmartMoney (March 13, 2011) “Retire Abroad: Golden Years Go Global”

ELDER LAW / QUALIFIED RETIREMENT PLANS

“For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.” -- Marcia Wagner, principal of Boston-based Wagner Law Group, a law firm specializing in employee benefits If you’ve been a diligent saver and keeping an eye on your 401(k) for all these years, it’s important to remember that the tax-man also has been looking on with interest and waiting for his cut. It’s simply too easy to forget, but a traditional IRA is tax-deferred until withdrawal, so that balance is deceiving. What is more, it means that the tax you will owe has yet to be decided. A recent MarketWatch article points out the strong possibility of higher tax rates for 401(k) savers once they reach retirement. The value of delaying a tax hit into retirement, one of the principal benefits of a traditional IRA, has always been to avoid heftier taxes and secure what are expected to be lower tax rates whilst in retirement. Unfortunately, those expectations may not pan out for diligent savers with large IRAs. If your account is robust enough to keep you at or near your present income, then it’s also enough to keep you at or near your current tax bracket. If you are far from retirement then this may not be too distressing. After all, while you may be paying similar taxes upon withdrawal, your retirement investments are working for you with tax-free appreciation in the meantime. Given the tax-rate outlook, savers should assess ways to diversify their tax situation in retirement. That means at least considering putting a portion of the amount you save for retirement into a Roth IRA – or a Roth 401(k) if one is offered by your employer. “If you think taxes are going up, it makes sense to pay your taxes when rates are low, put the after tax amount into the Roth and take out your money tax-free when tax rates are high,” said Alicia Munnell, director of Boston college’s Center for Retirement Research and a professor at the school’s Carroll School of Management. As summed up by Marcia Wagner of Wagner Law Group, “For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.”

Link: http://www.marketwatch.com/story/higher-tax-rates-loom-for-401k-savers-2011-03-28?pagenumber=1

 From MarketWatch (March 28, 2011) “Higher Tax Rates Loom for 401(k) Savers”

SMALL BUSINESS / RETIREMENT

If you’re over age 50, have substantial assets in your qualified retirement plan, and always dreamed of being your own boss, you are not alone. In fact, you may decide to join the growing number of baby boomers who are tapping their retirement savings for start-up capital on a new business. The Wall Street Journal, along with SmartMoney, recently discussed the trend, the possibilities, and the potentially dangerous risks involved. Here is the strategy, which the IRS called a Roll Over as Business Startup (ROBS). First, you create a legal corporation with its own 401(k) plan into which you can transfer all of your funds from a previous employer-held plan. With those funds, you can then invest the 401(k) into your new corporation in exchange for shares. What once was simply retirement money has thus become start-up capital. The problems with this approach are probably obvious: most start-ups fail, but if you fund your start-up with your retirement money then your retirement also goes down the drain. That is probably the biggest risk, but don’t discount the IRS. While this move is legal (if done properly), it does invite IRS scrutiny. This financing move has become popular enough to draw the attention o f the IRS, which has suggested that these kinds of rollovers “seek to exploit the generous tax benefits enjoyed by qualified retirement plans.” The agency has called for added scrutiny on firms that use them. Still, some financing firms like Guidant Financial have seen increases in this method (a 30% increase in the case of Guidant Financial, for example). David Nilssen, co-founder of Guidant Financial Group, Inc., says the IRS has never called thse kinds of rollovers non-compliant, only that it would watch firms funded by 401(k) rollovers more closely. To be sure, there are risks involved. But the profile of an entrepreneur is one of a risk-taker. And then there are other risks at play. Many baby boomers facing retirement simply are not prepared to stop working. That retirement nest egg may not be enough to finance a comfortable retirement, but it just might be enough to finance a second career as an entrepreneur, providing income that could make an eventual retirement that much happier.

Link: http://blogs.wsj.com/in-charge/2011/04/06/tapping-retirement-savings-for-a-start-up/

From The Wall Street Journal Online – WSJ Blogs (April 6, 2011) “Tapping Retirement Savings for a Start-up”

SMALL BUSINESS / RETIREMENT PLANS

There are quite a few different retirement options out there and many specifically designed for small businesses If you are a small business owner, you may be seeing a slight uptick in your business – and your confidence. In fact, many small business owners are starting to think about hiring a few more people, and perhaps even offering a few employee benefits again … such as a retirement savings plan. Stuart Robertson of Forbes recently wrote a brief, concise overview of the top three retirement plans available for small businesses (those with 25 or fewer employees). Before you start researching options, Forbes suggests you ask yourself these five questions: 1. Can I afford a match for my employees? 2. Do I want to allow employees to contribute to the plan? 3. If so, will some want to save more than $11,500 a year? 4. Do I need flexibility to access the funds prior to retirement for emergencies? 5. How important are managing future taxes (a Roth option) versus my tax needs today? Your answers to these questions will help you choose between what Forbes considers the top three options: the 401(k), the SEP IRA, and the SIMPLE IRA. The 401(k), which is probably the most well known, is also the most versatile in that you can choose to match employee contributions or not and provide a vesting schedule. It’s also versatile for employees in that you can enable penalty-free access to the funds (by way of loans) and offer “catch-up” contribution opportunities to employees over age 50. Finally, you could also elect for Roth 401(k)s that switch taxation to contribution rather than distribution, if you or your employees fear higher taxes in the future. The SEP IRA, or “Simplified Employee Pensions” is exactly that, the modern equivalent of a pension. It means that only the employer contributes to the fund, and must do so for all employees, rather than the employee contributing and the employer matching or not. The penalties are generally smaller, and it’s fairly easy to start, but this is because it is fairly stripped down in comparison to the 401(k) as there is no Roth, no catch-up contributing, no profit-sharing, and no loan option. The SIMPLE IRA or the Savings Incentive Match PLan for Employees, offers the third option and lies somewhere in between the previous two. It is affordable, like the SEP IRA, but it operates by employer matching of employee contributions and offers catch-up options. Nonetheless, it is not quite as expansive as the 401(k), offering fewer options and having smaller contributions allowances. These of course, are just outlines to get the ball rolling, and although more information can be found in the original article (which has a helpful chart) you will also want to consult your professional advisor.

From Forbes.com (March 29, 2011) “Top Three Retirement Plans for Small Business”

Link: http://blogs.forbes.com/stuartrobertson/2011/03/29/the-top-three-retirement-plans-for-small-business/ 

ESTATE PLANNING / INHERITANCE PLANNING

According to recent research from The Center for Retirement Research at Boston College, 70% of baby-boomer households will receive inheritances worth a total of $8.4 Trillion. With an average of $300,000 for most inheriting households, and an average of $1.5 million for the wealthiest inheritors, the better part of a generation is expected to see a nice bump in their assets. The question, then, is what to do about it. Ashlea Ebeling of Forbes recently approached the topic with a number of considerations, from warnings to ideas. Consider Keeping it Separate. The first thing to take stock of is how your state handles inheritances. Most states consider an inheritance the separate property of the person who received it, as long as they keep it separate. So think carefully before you put the money into a joint account – or use it to make major improvements on a jointly owned home, for example. Keeping an inheritance separate can provide a level of asset protection -- by keeping it eparate you also shield it from loss due to your spouse’s debts and/or lawsuits. Special Treatment for Retirement Assets. If the inheritance is an IRA then you can use it to stretch out the withdrawals over your own life expectancy and in this way maximize the tax benefit on those funds. Don’t try to take the money out and redeposit in your own IRA. That’s not allowed. Instead, the IRA should be renamed. If you want to move it from one custodian to another, do so in a “trustee-to-trustee” transfer. In certain circumstances, you may even want to “disclaim” the account and give it to your children if you don’t need it. Review Your Own Estate Plan. Whatever the inheritance, it is now part of your estate. A sizable inheritance could push you into estate tax territory. Even if you aren’t in danger of estate taxes, you will still want to review your current plan to account for the inheritance assets. In the final analysis, receipt of an inheritance is one of those lifetime events that calls for proper assessment and planning. You can learn more about the estate plan review process on our website. You also can review a checklist of other life events that may alter your estate planning needs on Page 3 of this month’s issue of our estate planning e-newsletter.

ELDER LAW / QUALIFIED RETIREMENT PLANS

If you’ve been a diligent saver and keeping an eye on your 401(k) for all these years, it’s important to remember that the tax-man also has been looking on with interest and waiting for his cut. It’s simply too easy to forget, but a traditional IRA is tax-deferred until withdrawal, so that balance is deceiving. What is more, it means that the tax you will owe has yet to be decided. A recent MarketWatch article points out the strong possibility of higher tax rates for 401(k) savers once they reach retirement. The value of delaying a tax hit into retirement, one of the principal benefits of a traditional IRA, has always been to avoid heftier taxes and secure what are expected to be lower tax rates whilst in retirement. Unfortunately, those expectations may not pan out for diligent savers with large IRAs. If your account is robust enough to keep you at or near your present income, then it’s also enough to keep you at or near your current tax bracket. If you are far from retirement then this may not be too distressing. After all, while you may be paying similar taxes upon withdrawal, your retirement investments are working for you with tax-free appreciation in the meantime. Given the tax-rate outlook, savers should assess ways to diversify their tax situation in retirement. That means at least considering putting a portion of the amount you save for retirement into a Roth IRA – or a Roth 401(k) if one is offered by your employer. “If you think taxes are going up, it makes sense to pay your taxes when rates are low, put the after tax amount into the Roth and take out your money tax-free when tax rates are high,” said Alicia Munnell, director of Boston college’s Center for Retirement Research and a professor at the school’s Carroll School of Management. As summed up by Marcia Wagner of Wagner Law Group, “For the longest time, it seemed like almost a no-brainer that people, when they were in their income-earning stage, would be in a higher tax bracket … That may or may not be true in the future.”

SMALL BUSINESS / RETIREMENT PLANNING

From Wall Street Journal Online (Dec 27, 2010) “Many Employees don’t Understand Retirement Packages” “Survey responses indicate that the retirement-eligible employees in these companies had a rather low level of knowledge, a lack of confidence in their ability to make optimal retirement choices, and a strong desire for their employers to provide more formal pre-retirement planning programs” A recent study indicates that many employees simply do not understand their important facts about retirement, Social Security, Medicare, and other programs that impact their retirement planning. This does not bode well for employees, or their employers. As many employees plan their golden years (and their projected retirement age) based on faulty information, employers may want to step up and offer additional education. The study, conducted from 2008 to 2009 by North Carolina State University’s Robert Clark, Melinda Sandler Morrill and Steven G. Allen, concludes: “Survey responses indicate that the retirement-eligible employees in these companies had a rather low level of knowledge, a lack of confidence in their ability to make optimal retirement choices, and a strong desire for their employers to provide more formal pre-retirement planning programs.” The extent of the problem comes into focus with some choice data points used in a Wall Street Journal Online article about the study. • In surveys about the details of company and national retirement programs, workers only got an average of 50% of the answers correct. • Although almost everyone was aware of their pension, 56% were not aware of what percentage of their current salary that pension would be. • Many were unsure of employment in retirement. A quarter didn’t plan on work, while 38% wanted to remain full or part time, but 37% didn’t know what they wanted to do or what they would have to do. • Only 36% of respondents knew the company age for eligibility in the company pension, while 37% overestimated the age and 9% underestimated it • Only 37% knew the normal Social Security retirement age (but to be fair, many did better with the early retirement and Medicare eligibility ages.) If you would like to bring retirement planning education into your workplace, please contact our office. We would be happy to visit with you (or your employer) to design a workplace education program on Retirement Planning.

ELDER LAW / RETIREMENT PLANNING

From MarketWatch (Jan 31, 2011), “Don’t settle for less than the best in your 401(k) plan”
What should the best 401(k) plans do for you? And is yours the best it could be?
According to a recent study conducted by MetLife – the Qualified Retirement Plan Barometer – your 401(k) plan is probably falling short, because most plans simply don’t do all that a 401(k) plan ought to do. According to The Wall Street Journal’s MarketWatch, many plan sponsors aren’t offering important plan features that could greatly enhance your retirement savings plan.
What features are lacking? Primarily “help tools” and services. Studies show that plan participants who use the “help” tools and services provided by their employers tend to outperform participants who did not use these tools. In other words, if your employer doesn’t offer online calculators, one-on-one financial counseling, seminars and workshops – ask for them. If your employer does offer those tools, be sure to use them.
Link: http://www.marketwatch.com/story/dont-settle-for-less-than-the-best-in-your-401k-2011-01-31

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