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Financial Information for Senior Military Officers

Have You Planned How You Will Spend Your Money?

Have You Planned How You Will Spend Your Money?
Financial Advisors, myself included, spend a lot of time thinking and talking about investing money to have available for your Golden Years (had to get a cliché in).  But, not a lot of time is spent talking about how to best spend that money in retirement.  I'm not talking about what you will spend that money on.  That is up to you.  What I am talking about is where the funds will come from.  If you have multiple sources of retirement income, you can improve your results about thinking about which money you will spend first.  This is due to a very important acronym...RMD.  Required Minimum Distributions can significantly impact your tax picture and how much you will pay for medical care in retirement.  Let me explain.

 

If you have tax deferred accounts such as TSP, 401(k)s and Traditional IRAs when you turn 70 1/2 you will have to start taking a minimum distributions based on your age (if you are still employed then you can defer RMDs from your current employers' plan).  If the balances in your accounts is large that could amount to a great deal of money.  This can have a few results. 
 
First it could push you into the next tax bracket and/or cause you to lose deductions and/or credits.  Not good.  Although not likely for many readers of this newsletter due to pension income, it could cause previously untaxed Social Security Benefits to become taxable (this could be an issue for your parents if they don't have a pension) 
 
It could also cause you to pay a higher premium for your Medicare Insurance (which by the way you have to pay if you want to keep Tricare coverage under Tricare for Life).  As of this writing, the first threshold for an increased Medicare premium is $170,000 for those taxpayers that file Married Filing Jointly.  This is a pretty high threshold but it gets lower quickly. 
 
Let's look at the case of a retired married O-6.
  • Retired Pay:  $80,000
  • Social Security: $30,000
  • Spouse Social Security: $15,000
  • Total "Income":  $125,000
  • Deferred accounts balance to put you over $170,000: $1.23M ($45,000 x 27.4)

 

As of right now, as a result of ObamaCare, the $170,000 threshold is not inflation adjusted until 2017.  We'll see if that is extended beyond 2017.

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You've Made it When...

You've Made it When...
...The boss calls you in to talk about a "non-qualified" plan. 
 
A non-qualified plan is one that doesn't meet the Department of Labor's rules for employee benefit plans and normally they are set-up for key members of a company.  So, if your boss is talking about a non-qualified plan, you're doing all right.  The down side is that non-qualified plans are tricky and you can significantly change your tax bill by the decisions you make. 

For today, we'll talk about Restricted Stock Plans, one type of non-qualified plans.  Under a Restricted Stock Plan an employee (normally highly compensated or key personnel) is granted shares of stock (normally company stock) for free or a reduced price.  In line with the name, the stock is restricted.  Normally, the restriction is based on an amount of time passing or serving as employee for a certain amount of time (or both) and you won't be able to sell the stock until the restriction is lifted.  At the time of grant (when you buy or receive the stock) there are no tax implications.  This is because you have a substantial risk of forfeiture of the benefit as you get nothing if you don't meet the requirement to lift the restriction.  But there could be tax implications when the restriction ends.  Unless...

Let's start with the general rule.  Under the general rule when the restriction ends (the stock vests), you will be taxed on the difference between what you paid for the stock and the fair market value on that date.  Under the general rule the income is ordinary income and taxed at your marginal tax rate.  In other words, if the stock goes up in value, you will be paying taxes on capital gains at your marginal rate...not a good deal for you.  It is also important to note that you're not receiving any "real" income when this happens only a right.  You'll have to pay that tax with "real" money.

Section 83(b). Under Section 83(b) of the Tax Code you have the option to pay some taxes now to save taxes in the future.  If you select to exercise the Section 83(b) election you will pay taxes on the discount (the difference between the price and current fair market value) when you are granted the restricted stock.  In some cases there may not be a discount element (often the case in start-ups) when you are granted the stock.  This income is taxed at your marginal tax rate.  If the 83(b) election is taken, then there is no tax implications when the restriction is lifted and taxes will only be due when the previously restricted stock is sold.  And all the gains will be taxed as capital gains and almost certainly the capital gains tax rate will be lower than your marginal tax rate.

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Don't Leave Money on the Table (And Don't Get Double Taxed Either).

Don't Leave Money on the Table (And Don't Get Double Taxed Either).
You've decided to "Hang-up" your G-Suit or ABUs or whatever uniform you wear to work each day.  You're pretty confident you'll roll into the new job you've been looking forward to and it won't take too much time.  If your new job offers a 401(k) (or 403(b) or TSP) there are some things you need to think about AND you need to make sure you don't screw up some other things.  By the way, these concepts also apply if you change civilian jobs during a year.
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Your Life Expectancy After You're Dead? Yes, the IRS Says You Have One.

Your Life Expectancy After You're Dead? Yes, the IRS Says You Have One.
One of the great advantages of Qualified Plans and Traditional IRAs is that you get to deduct your contributions today and the earnings on your account accrue tax deferred.  But, the IRS wants to get that tax money...and the sooner the better.  You must take Required Minimum Distributions (RMDs) by your Required Beginning Date (RBD).  (By the way, I like this article...I've already worked in two acronyms in the first paragraph!)  For most, the RBD is 1 April of the year after you turn 70 1/2.  Most of us know that.  But most of us don't know how much we have to take out.  The amount you have to take out is based upon your life expectancy.  But you say, "I don't know how long I'll live!"  Not to worry, the IRS knows how long you will live.  They know everything...

Your Own IRA

In most cases, calculating RMDs for your IRA is relatively simple.  The IRS has a uniform life expectancy tables that will tell you how long you will live.  For example, at age 70 the life expectancy of an IRA owner is 27.4 years.  What is interesting is that if your spouse is more than 10 years younger than you, your life expectancy increases (I'll leave that to the IRS to explain).  For example, if you're aged 70 and your spouse is age 50 your life expectancy is 35.1 years.    Once you determine your life expectancy you simply divide your account balance on 31 Dec of the prior year by your life expectancy to determine your RMD.

On a related note, according to the IRS if you make it to 115 you may never die as the life expectancy for those age 115 and older is 1.9 year.  So, at each birthday after age 115 you've still got 1.9 years to live.  Again, I'll leave it to the IRS to explain.

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What You Don't Know About TSP RMDs Could Hurt You

What You Don't Know About TSP RMDs Could Hurt You
One of the main reasons to contribute to TSP is so that you can take the money out and spend it in retirement.  Often though, retirees may not need or want to take their money out of the Thrift Savings Plan (TSP).  But, the IRS wants you to take the money out, more than you want to leave it in TSP and they have the power to make you do it.  You have to take out Required Minimum Distributions (RMDs)

The IRS (Congress more accurately) says that you must start taking distributions from your TSP by April 1st (not the 15th) of the year after you turn 70 1/2.  If you're still employed by the US Government when you turn 70 1/2 then your RMDs are deferred....generally until Apr 1st of the year after retirement.  Realize that if you avail yourself of the 1 Apr option you will have to make two RMDs that year.  One for the age 70 1/2 year and one for the current year. 

Since the IRS "knows all" it knows how long you will live.  There is a table of Uniform Life Expectancy" that you use to determine how much you must take out each year.  It is important that you get this right, as the penalty for withdrawing too little is 50% of the amount you didn't take out.  That is one of the highest penalties I know of.

Whether you are taking RMDs or any other type of distribution, your distribution will be "proportional".  For example, if you have 50% in the Roth TSP, 50% in the "normal" TSP and 5% of your "normal" TSP balance is tax exempt (from contributions made in a combat zone) your distribution will be 50% Roth, 45% normal and 5% Tax Exempt.  The same holds true for funds.  If you have 50% in the G Fund and 50% in the C Fund your distribution will be 50/50 G and C Fund.  Nothing too out of the ordinary here.  Where things do get weird is if you fail to direct TSP to take out distributions.

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Disclaimer

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC ’s current written disclosure statement discussing our advisory services and fees is available for review upon request. DISCLAIMER OF TAX ADVICE: Any discussion contained herein cannot be considered to be tax advice. Actual tax advice would require a detailed and careful analysis of the facts and applicable law, which we expect would be time consuming and costly. We have not made and have not been asked to make that type of analysis in connection with any advice given in this blog post. As a result, we are required to advise you that any Federal tax advice rendered in this blog is not intended or written to be used and cannot be used for the purpose of avoiding penalties that may be imposed by the IRS. In the event you would like us to perform the type of analysis that is necessary for us to provide an opinion, that does not require the above disclaimer, as always, please feel free to contact us.

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