Five Things to Consider Before Retiring Early

January 13, 2018

fee only financial advisor kansas cityThe magic number for most people to retire is age 65.  However, some people will retire before then, whether by choice or by chance.

If you will be retiring before “normal retirement age”, you may face many challenges, such as how to tap into your assets, the high cost of health care before Medicare age, and how to stretch your assets out for a longer retirement period.

If you are considering retiring early, here are five things to consider before turning in your pink slip.

1. The IRS doesn’t want you to touch your retirement accounts before your sixties. To enforce this, it assesses a 10% early withdrawal penalty if you tap into your IRA before age 59 ½.  There are a few ways to get around this rule.

One way to avoid the 10% penalty is by taking 72(t) distributions. Under a provision in the Internal Revenue Code, you can withdraw funds from a traditional IRA prior to age 59½ in the form of substantially equal periodic payments (SEPPs) over the course of your lifetime. The schedule of payments must last for at least five years or until you reach age 59½, whichever period is longer. Once the schedule of periodic payments is established, it cannot be revised – if the payments are not taken according to schedule, you will be hit with the 10% early withdrawal penalty on all the payments taken. Distributions under a 72(t) plan are taxable income.

Or, you can choose to leave your 401K with your employer when you retire. 401K plans have different age requirements than IRAs. Unlike an IRA, if you separate from service (retire or otherwise lose your job) at age 55 or later, and you leave your funds in your employer’s retirement plan, you can take distributions without penalty.  If you retire or lose your job before reaching age 55, this exception does not apply.

If you have a Roth IRA or Roth employer-sponsored retirement account, things get easier. You can withdraw your contributions to these accounts at any time without incurring taxes or penalties. At age 59½ or older, both account contributions and account earnings can be distributed tax free and penalty free if you have held the account for at least five years.

2. The cost of healthcare for retirees can be very high; some early retirees even get a part-time job just to pay for health insurance! If you retire early, you could have several years before you are eligible for Medicare. Some companies offer retiree health coverage, but this is rare. COBRA is available for 18 months after you retire, but if you are still under Medicare age when COBRA ends you will need to purchase your own insurance.  Health insurance for early retirees can be very high (the average monthly premiums for people age 55-64 were $580 according to eHealth’s Health Insurance Price Index Report for 2016), so you will need to plan for this if you are retiring early.

A health savings account can help bridge the high health coverage cost for early retirees. Contributions to HSAs are tax deductible, and the assets within them grow tax-free. HSAs can help with health care costs until you reach Medicare age; in addition, they are also sometimes called “backdoor IRAs” because you can use the money within them for any reason without penalty once you turn 65, not just for qualified health care expenses.

3. Your assets will need to last longer when you retire early. With the average life expectancy in the mid-80s and many people living into their 90s, your assets may need to last for 30-50 years! To avoid outliving your money, you will either need to save more, work part-time during retirement, or reduce your withdrawal rate.  Most people have heard of the 4% withdrawal rate as a baseline to keep from running out of money during your lifetime. However, this may be too optimistic if you are retiring early; 3% or 3.5% may be more realistic if you will be retired for 30 years or longer.

4. You can’t tap into Social Security until age 62, and even then, you may not want to. If you retire before age 62, you won’t have access to Social Security, a main income source for retirees in the United States.  The full retirement age for people retiring today is age 66, so if you start collecting benefits at age 62 you will be penalized.  Many early retirees plan on starting Social Security at age 62, but that may not be your best strategy. The trade-off for collecting benefits early is that you will receive proportionately smaller monthly benefits over the rest of your life compared to the larger monthly benefits you could receive by claiming at your full retirement age or later. With inflation and the related cost of living adjustment that Social Security beneficiaries receive, delaying benefits can make a big difference in your later years.

5. Retiring early can mean tax challenges, and tax planning opportunities. As mentioned earlier in the article, tapping into your retirement accounts when you retire early can be challenging. However, retiring early can also present tax planning opportunities, such as doing Roth IRA conversions or selling appreciated assets at the lower long-term capital gain tax rate while you are in a lower tax bracket.

As you can see, retiring early has many financial challenges. You should consult your financial or tax advisor before making any early retirement decisions. This is a critical financial juncture in your life, and whether you find yourself retiring early by choice or by chance, the decisions you make could have lifelong impact.

This material was prepared in part 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.

Kristine McKinley is a fee only financial advisor in Kansas City, Missouri. Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis. To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.

Maximizing Charitable Donations Under the New Tax Law

December 28, 2017

Many people will no longer be able to itemize under the new Tax Cuts and Jobs Act, which means that charitable donations won’t be as valuable from a tax perspective.

Here are some ways to maximize your charitable giving and still receive some tax benefit:

1. Accelerate your 2018 donations into 2017. By doubling up on your dontions before year end, you will increase your deductions for the 2017 tax year. If you will have itemized deductions close to the standard deduction in future years, consider doubling up on your donations every 2-3 years; this may boost your itemized deductions enough to get you over the standard deduction amount.

2. For taxpayers age 70 1/2 or older, you can contribute directly from your IRA to a qualified charity. Donations made directly from your IRA to a qualified charity are deducted directly from your taxable income, giving you the tax benefit even if you don’t itemize your deductions.

3. Consider using a donor-advised fund. With a donor advised fund, you can contribute cash or appreciated investments to an account, take the deduction on your taxes, and distribute the donations to charities at a later date or over multiple years. This can be helpful if you want the tax deduction now, but don’t know who you want to donate to or if you want to be able to spread the donations out. Donor advised funds are available from brokers such as Vanguard, Schwab and Fidelity and usually have a minimum of $5,000-25,000.

The deadline to make donations for the 2017 tax year is December 31, 2017.

Kristine McKinley is a Kansas City CFP and CPA.  Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis.  To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.

Summary of the New Tax Law – The Tax Cuts and Jobs Act of 2017

December 22, 2017

The Tax Cut and Jobs Act of 2017 was passed by Congress earlier this week and signed by President Trump this morning.

kansas city cfpSince 2017 is winding up, I wanted to pass along a quick summary of the tax bill. If you are one of the many Americans who will no longer be itemizing under the new bill, you may want to do some planning before the New Year arrives.

Tax Brackets for Individuals

The biggest change will be to the tax brackets. Original proposals called for reducing the current seven tax brackets to just three. While that didn’t make the final cut, the new tax brackets will be lower for almost everyone.

Current tax brackets: 10%, 15%, 25%, 28%, 33%, 35%, and 39.6%.

New tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 37%. Note that these are only temporary; they will revert to the current tax brackets after 2025.

Single Joint
10% tax bracket    $0 – $9,525   $0 – $19,050
Beginning of 12% bracket $9,526 $19,051
Beginning of 22% bracket $38,701 $77,401
Beginning of 24% bracket $82,501 $165,001
Beginning of 32% bracket $157,501 $315,001
Beginning of 35% bracket $200,001 $400,001
Beginning of 37% bracket $500,001 $600,001

The rates for long-term capital gains and qualified dividends remain unchanged at 0%, 15% and 20% depending on which tax bracket you are in (the income ranges are similar to 2017 with small inflation adjustments).

Planning Tip: If possible, try to push or defer 2017 income to 2018 (not an easy task with just a little over a week left in 2017; however, if you can increase retirement contributions or other deductions before year-end this will help reduce your taxable income for the year).

Standard and Itemized Deductions

Another change that will impact many people is that the standard deduction was increased substantially. For 2018, the standard deduction for individuals under the old law was $6,500; under the new law it will be $12,000. For married taxpayers, the standard deduction is increasing from $13,000 to $24,000.

Many people that itemized deductions in the past will now be taking the standard deduction.

However, for those who will still be itemizing deductions, there are a few other changes that may impact your deductions.

Medical expenses above 7.5% will be deductible. The AGI floor under pre-existing law was 10%.

State and local taxes (including income taxes, real estate and personal property taxes) will be limited to $10,000.

Home mortgage interest deduction will be limited to the first $750,000 of debt incurred.

Casualty and theft losses will only be deductible in federally declared disaster areas only.

Job expenses, moving expenses and most miscellaneous deductions will no longer be deductible.

Planning Tip: If you currently itemize but will not be able to under the new law you should consider increasing your charitable donations for 2017 (many people will double up their 2017 donations and decrease 2018 donations).

Planning Tip: If you make estimated tax payments, make your fourth state estimated tax payment before December 31. Also, make sure you pay all property taxes before the end of the year. If you live in a county or state that allows you to prepay property taxes (Jackson County, MO does not), consider prepaying your 2018 property taxes.

Personal Exemptions

Under the old law, taxpayers were able to deduct $4,150 for themselves, their spouse and any dependents. The new law eliminates the personal exemption. Unfortunately, the higher standard deduction may not make up for the loss of the personal exemptions for many families.

Child Tax Credit

To make up for the loss of the dependent exemption, the new law increased the child tax credit from $1,000 to $2,000. In addition, the maximum refundable amount was increased to $1,400. The income limit for the credit was increased substantially (from $75,000 to $200,000 for single taxpayers and from $110,000 to $400,000 for married taxpayers) so more people will qualify for the credit.

These changes are temporary and will revert to previous tax law after 2025.

Alternative Minimum Tax (AMT)

Early proposals eliminated the AMT. While the AMT survived the final bill, the exemption amount was increased from $86,200 to $109,400 for married tax payers, so less people will be subject to AMT.

Retirement Plans

Contribution levels for retirement plans will remain the same under the new plan. The main change under the new plan is that people will no longer be able to recharacterize (or undo) Roth conversions.

Health Insurance

The requirement that individuals must be covered by a health care plan with minimal essential coverage has been eliminated. People will no longer be penalized for failing to maintain coverage after December 31, 2018.

Estate Tax

The estate and gift tax exclusion has been doubled under the new law to $11,200,000. This provision ends after 2025.

Business Tax Provisions

The maximum corporate tax rate under the new tax law is 21%; the alternative minimum tax for corporations has been eliminated.

Individual taxpayers can deduct 20% of business income (not including wages) from a partnership, S corporation or sole proprietorship. The deduction is limited to 50% of W-2 wages.

As typical, Congress waited until the last minute to pass the new tax law, giving Americans little time to plan for the upcoming changes. Even so, I hope this summary was helpful. Happy Holidays!

Kristine McKinley is a fee only financial advisor in Kansas City, Missouri.  Kristine provides retirement planning, tax preparation and planning, investment reviews and comprehensive financial planning on a fee-only, as needed basis.  To schedule your complimentary introduction meeting, please contact Kristine at kristine@beacon-advisor.com.

Services

Beacon Financial Advisors, LLC, is a fee-only financial planning and Registered Investment Advisory firm headquartered in Lee’s Summit, Missouri and serving the greater Kansas City area.

The firm offers comprehensive financial planning services. Beacon advisors work solely for their clients. Click here to learn more about our services.

About Us

Kristine McKinley, CFP®, CPA, is the founding principal of Beacon Financial Advisors, LLC, an independent, fee-only financial planning firm located in Lee’s Summit, Missouri and serving the greater Kansas City area.

Kristine focuses on providing fee-only financial planning, investment advice, and tax preparation to individuals and families from all income levels.  About Us

In the News

Investment News – Kristine McKinley discusses the 0% Social Security COLA (for 2016) in No Social Security cost-of-living adjustment in 2016.

Kiplinger Magazine/NAPFA – Kristine McKinley answered reader’s tax questions during the 2013 Jump Start Your Retirement Plan Days sponsored by Kiplinger magazine and the NAPFA Consumer Education Foundation.