Very Costly Mistake: Out-of-Date Beneficiary Designations

If you have a will, have you looked at in the past couple of years and updated if necessary?

That’s important, but don’t assume that it’s enough to ensure that all your wishes are carried out in the event of your demise. It isn’t.

What about the beneficiary designations on your qualified retirement accounts, individual retirement accounts, annuities and life insurance policies? Are those up to date and exactly as you want them to be?

Naming the wrong people or failing to update those financial documents can create a mess for your heirs.  A fact that many seem to miss is that beneficiary designations override wills. Unfortunately, too many families learn that too late, after a loved one died believing that his or her will took precedence over everything.

If it’s been years since you opened your accounts, you might not recall whom you designated as beneficiary on some of them. What if that person has died or others have been born since? What if your relationship has changed and you no longer want that person to get your money when you die? (Think marriage and divorce, the death of parents, birth of children or the breakup of an old friendship.)

Regardless of what your will states, whoever is named as beneficiary on the various financial accounts mentioned above is who will receive those specific assets. Period. End of story.

But that’s not the only costly mistake that is common in naming beneficiaries. Here are six others you’ll want to avoid:

1. Not naming a beneficiary. If you don’t name anyone, your estate becomes the beneficiary. That means the asset could be subject to a lengthy, expensive and cumbersome probate process—and people you might not prefer could wind up with the asset.
2. Failure to list contingent beneficiaries. If your beneficiary dies first and you haven’t named a contingent (or secondary) beneficiary, it’s the same as having no beneficiary. If you and your spouse die at the same time (say, in an auto accident) and you’ve not named the kids as contingent heirs, your estates go into probate. Naming a contingent has another advantage, too: If the primary beneficiary doesn’t want the asset for some reason (perhaps because of tax implications), he or she can waive rights to it, allowing the money to pass to the contingent beneficiary. Many surviving spouses do this for their children, and it can be a smart way to avoid or reduce taxes. But if you fail to name a contingent beneficiary, this opportunity is lost.
3. Lack of specifics. Simply listing “my children” as your beneficiaries can be a problem, especially in a blended family. Many states don’t recognize stepchildren when the word “children” is used. Or some family member you’ve lost contact with and with whom you don’t intend to share your assets could suddenly turn up and try to claim all or part of the estate. Finally, what happens if one child predeceases you? Unless you get specific, that child’s share will go to your other children instead of to that child’s children. Unless it’s your intent to disinherit some of your children or grandchildren, you need to be more specific.
4. Using shortcuts. If you have three children and you want all three to receive an asset, you need to name all three as beneficiaries. Too often, we find that a client has listed only one child, believing that this person will then give the others their shares. That is a very big mistake. Even assuming the child is so inclined (legally, they don’t have to), the IRS might interfere by levying taxes on the amounts redistributed. Shortcuts are never a good idea with legal documents.
5. Missing beneficiary designation forms. Let’s say your forms are on file with a custodial company but that firm is acquired by another in a merger. Records are sometimes lost or destroyed in that situation. Without a verifiable form to prove beneficiary status, the default provision of the plan applies, which often is: “spouse first, if living; then the estate.” Keep copies of your beneficiary forms in a safe deposit box, and make sure your financial advisor, estate attorney and executor have copies.
6. Not considering the financial or emotional readiness of beneficiaries. Your heirs will get the money in your IRAs, retirement accounts, life insurance and annuities almost immediately upon your death, with no restrictions. If this worries you, consider naming a trust as beneficiary; then you can place limits on when and how the money is to be used.

You devoted a lifetime to accumulating assets, so make sure the disposition is managed the way you want them to be or your efforts could be for naught. That’s why it’s essential for you to take the time and the proper steps to work closely with an estate attorney and with your independent, objective financial advisor.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

6 Steps to Securing Your Retirement Portfolio

Few people reach retirement with perfectly allocated and optimized 401(k)s or IRAs. Only about 45 percent of all workers even have access to a workplace retirement plan at all, according to the Washington, D.C.-based Employee Benefit Research Institute. But if you do have one, chances are good you have more than one.

The nature of the employment system is that people accumulate accounts as they change jobs, and they often end up with a hodgepodge of investments that leaves them vulnerable to risk of all kinds, including a portfolio that’s so volatile it could take a dip just when you need the money, a portfolio that is so conservative you lose to inflation, or a portfolio that is not optimized for taxes.

A snapshot of the U.S. retirement market tells the story. Of the $23 trillion in retirement assets, more than half is in 401(k)s and IRAs, and the rest is in defined benefit plans, annuities, state and local pension plans and an array of other financial vehicles, according to the Investment Company Institute’s most recent 2014.

Just beginning to think about what you need to do may be the hardest step. But ignoring your portfolio could come at a high cost if history catches you at the wrong moment. At the end of 2007, investors were woefully weighted with stocks, according to the Employee Benefit Research Institute. Nearly 1 in 4 Americans ages 56 to 65 had more than 90 percent of their account balances in equities at year-end 2007, and over 2 in 5 had more than 70 percent. Equities declined nearly 40 percent the following year, wiping out billions in retirement savings for many retirees. It forced many near-retirees to delay stepping out of the workforce.

So now, as the economy hums along and the market reaches new highs, it is a good time to re-calibrate that retirement portfolio against volatility that may strike at any time.

1. Figure out what you need. Most financial advisors will tell you that as you enter your 50s, you should have a firm idea of the budget you’ll need in retirement. So before you begin, you’ll also have to have a clear sense of your required monthly income.

**According to The Federal Reserve’s Survey of Consumer Finances, a typical American household in the 55-to-64 age range has accumulated about $120,000 in retirement assets, only enough to produce $400 to $500 of monthly income before Social Security. The typical Social Security benefit is about $1,887. If that’s not enough, you’ll need to make some changes.

2. Save more, and extend your working life. The most effective lever you have for a successful retirement portfolio is to save more. That means increasing your contributions during your working lifetime or work longer.

**Suppose you need $80,000 a year in retirement. If you can continue to earn $100,000 a year for five years past your expected retirement date and put aside $20,000 or $30,000 of that a year, you will have added a total of six to seven years of income to your portfolio. You can also increase your Social Security benefit 76 percent a month by delaying your claim from 62—the earliest year you’re allowed to claim—to 70.

3. Diversify. If you want to lower the unexpected reality of volatility within your portfolio, diversify among various asset classes. That means owning mutual funds instead of individual stocks and having multiple asset classes represented instead of just one; emerging markets stock and bond funds in addition to domestic stock and bond funds. Equally important, keep your fees low.

** Vanguard expects returns for a balanced portfolio of 60 percent stocks and 40 percent bonds over the next 10 years to range from –3 percent to 12 percent, with the most likely scenario between 1.5 percent and 7.5 percent a year on an annualized basis. Equities alone are forecast to have a return centered on the 6 percent to 9 percent range, but with a possible swing from year to year of 18 percent. Bonds expected returns are in the 1.5 percent to 3 percent range. The translation: You’ll probably earn nearly as high returns with a balanced portfolio, but you’ll face much less volatility.

4. Design your asset allocation with an view of taxes. If you have significant holdings outside your retirement accounts, think through which asset classes belong in your retirement account. You’ll save significantly on taxes if you keep the equities—which you may buy and sell more frequently as you re-balance—in your retirement portfolio. But don’t make your portfolio decisions only around your tax savings; optimizing your investment returns and keeping your principal safe is a higher priority.

5. Equities should not to be avoided. Don’t make the mistake of significantly selling all of your equities and shifting into money market funds because you think they are safer. That would likely be too conservative for the long term. If you look at the returns of equities and cash every year since 1926, equities lost value in 1/3 the time on a real basis but cash also lost money 1/3 the time too, because of inflation. Most experts recommend that in retirement you have at least a 20 percent allocation to equities.

6. Periodically re-balance. You’ll be retired for a long time, so in order for your money to keep working in the best way possible you need to continue selling high and buying low as a process, which is what re-balancing does for your portfolio.

You devoted a lifetime to accumulating assets, put these steps into action and protect your hard earned dollars. More importantly, work closely with a competent, qualified, independent and objective financial advisor.

 The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

Traditional or Roth IRA, Which is Right for You?

Do you need to plan more for your retirement?  These days who doesn’t?

You may want to consider opening an individual retirement account to complement any workplace savings plan for which you might be eligible.  IRAs provide the potential for tax adantaged, compound growth of your retirement savings.  One key consideration in establishing a new IRA though is to decide whether a traditional IRA or Roth IRA makes the most sense for you. Contrasting the immediate and long term benefits of each will follow:

Rules that Apply to both Traditional or Roth IRA

• Income Limits – To qualify for IRA contributions in 2011, your income must not exceed $169,000 (phaseout from $169,000 – $179,000) for married couples filing jointly and $107,000 (phaseout from $107,000 – $122,000) for single filers.
• Contribution Limits – Both types of IRA have the same maximum annual contribution limits: $5,000 for tax year 2011, plus an additional $1,000 “catch-up” contribution for those 50 and older in that year.
• Timeline for Contributions – Contributions to either IRA  for 2011 can be made until 4/15/2012.  Note that Roth IRA accounts must be opened by 12/31/2011.

Traditional IRA 

With a Traditional IRA your contributions are tax-deductible, provided you don’t participate in a retirement plan at work.  If you and/or your spouse contribute to a workplace plan, you may still be able to make tax-deductible contributions if your income falls below certain limits.  Here your investments will grow tax-deferred until you withdraw money in retirement.  Any withdrawals are then taxed as ordinary income.  The IRS requires that you begin taking minimum withdrawals by age 70 ½.

In essence, a traditional IRA provides a modest tax break now and the promise of tax-deferred, compound growth into the future.

Roth IRA

With a Roth IRA, your contributions are made with after-tax dollars and investment growth is not taxed at all!  You can begin to make withdrawals without tax or penalty as long as the account has been in existence for more than five years and you are older than age 59 ½.  So while a Roth IRA provides no immediate tax break, it does offer the tremendous benefits of both compounding and tax-free growth!  A Roth also provides significantly more flexibility than a traditional IRA.  Since your Roth contributions are made with after-tax money, you can withdraw them at any time!  Additionally, unlike a traditional IRA a Roth IRA does not require minimum withdrawals after age 70 1/2.  As a result, your funds potentially can grow tax-free indefinitely—providing income in later retirement or becoming part of your estate.

The Bottom Line

If you are eligible for either a Roth or a tax-deductible traditional IRA, you must decide whether getting a tax deduction now is more important than not having to pay tax on withdrawals.

Younger investors in particular may benefit greatly from the Roth’s tax free growth. Other investors may find the ability to deduct their contributions now more compelling—for example, if they are in a high tax bracket today, and expect to be in a low bracket during retirement.

Regardless of which type of IRA you select, the tax-sheltered growth of an IRA can be a powerful ally in funding your retirement expenses.  Most importantly, the key to a successful retirement is making contributions to a qualified retirement plan both early and consistently.  No matter what market or economic environment we are experiencing, it’s important to stay focused on your long-term goals.  Contributing to your own personal IRA is a great way to do that.

The information herein contained does not constitute tax advice.  Any decisions or actions based on tax related information contained herein should not be made without first consulting a CPA or Accountant.

For more information contact Compass Asset Management Group, LLC  at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Tax-smart Strategies for Retirement Income Distribution

The first wave of baby-boomers turns 65 this year, and that means millions of new retirees will begin to switch from accumulating a nest egg to drawing income from it. If you’re a boomer, it’s time to start thinking about how you’ll convert decades of savings into a lifetime stream of income, which accounts to tap first and how best to navigate. Different sources of income have different tax consequences. Withdrawing funds in the most tax-efficient way will not only minimize your tax bill but could also make your savings last longer.

Key Strategies for Retirement Income Distribution

Knowing which accounts to raid first can stretch your savings.

Generally, if you benefited from a tax deduction for contributing to an IRA or 401(k), every dollar you withdraw later will be taxed at your ordinary income-tax rate — currently as high as 35%. Each year, you’ll receive a Form 1099-R from your account custodian that documents the taxable distributions to report on your tax return.

 If you took a pass on the upfront deduction by contributing or converting funds to a Roth IRA, you’ll enjoy some tax-free income in retirement. Your annual Form 1099-R will note that you received a distribution from a Roth account, but it won’t specify whether any of the money is taxable (you’ll have to calculate that yourself on Form 8606, available at http://www.irs.gov). You may withdraw Roth IRA funds, up to the cumulative amount of your contributions, at any time tax-free and penalty-free. But you must wait until you are at least 59 1/2 years old and the account has been open at least five years before you can access the earnings tax-free (unless you use the money to buy a first home).

If you made nondeductible contributions to a traditional IRA, distributions are a little trickier.

Spread out the tax liability

Just as you should diversify your assets among various types of investments to minimize your risk, it’s a good idea to vary your tax liability.  The old assumption that you would be in a lower tax bracket in retirement is not only more questionable but hopefully for you, improbable!  The liklihood that future income tax rates will rise is greater now more than ever.  Hence, it makes sense not to put too many of your eggs in a single basket.

If you have been contributing to a 401(k), 403(b), 457 plan or a federal Thrift Savings Plan, have you avoided accumlating assets in taxable savings and investment accounts?   Reconsider, current tax laws could tax those assets at a lower rate than ordinary income from the retirement plans.  You may also want to contribute to or convert some retirement funds to a Roth account so that you will have more control over how much you pay in taxes in retirement.

First out: Taxable accounts

Conventional wisdom suggests that you should withdraw money from your taxable accounts, can benefit from lower capital-gains rates, before touching your retirement funds. Tapping taxable accounts first not only minimizes your tax bill but also allows your traditional IRAs and other tax-deferred accounts to continue to compound unfettered by taxes for as long as possible. The result: a bigger nest egg.

Of course, every rule has its exception.  Sometimes it pays to tap into your tax-deferred retirement accounts once you can — but before you are required to — so that your IRA doesn’t grow too big, which would result in large required minimum distributions each year after you turn 70 1/2, along with hefty tax bills.

If you have a brokerage account and sell assets that you’ve owned for more than a year, you’ll pay just 15% on your profits and, in some cases, no tax at all. Or, if you sell an asset in a taxable account at a loss, you can use it to offset investment gains, potentially wiping out any tax liability on your profits. Excess losses may be used to offset up to $3,000 of ordinary income per year and may be carried forward to offset income in future years.  You generally cannot claim tax-deductible losses in a retirement account.  Qualified dividends are also taxed at a maximum 15% rate or 0% for those who are eligible.  Although interest on your savings is taxed at your ordinary income-tax rate, the principal (the money you originally invested) is tax-free.

Next: Retirement accounts

After exhausting your taxable accounts, focus on your traditional retirement accounts, such as IRAs, 401(k)s and other employer-based retirement plans. You’ll pay taxes on your entire withdrawal at your ordinary income-tax rate (except for any after-tax contributions you made, which would be tax-free). If you need $20,000 per year in after-tax money, for example, and you’re in the 25% tax bracket, you’ll have to withdraw nearly $27,000 from your IRA.

You can start taking withdrawals from your traditional IRA penalty-free once you turn 59 1/2, but you’ll owe federal and possibly state income taxes on the distributions. You probably can’t invade your 401(k) or similar employer-based retirement account while you’re still working, unless your plan has an in-service distribution provision that allows you to take withdrawals once you reach the 59 1/2 milestone.  But if you leave your job when you are 55 or older, you can take penalty-free withdrawals (but still owe taxes). If you roll over your retirement funds to an IRA before age 59 1/2, you’ll lose this early-out option.

Once you turn 70 1/2, it’s time to reimburse Uncle Sam for all those years of tax-free growth. You must start tapping IRAs and other traditional retirement accounts by April 1 of the following year and take withdrawals by December 31 each year after that.  If you delay your first distribution until April 1, you’ll have to take a second distribution by the end of that same year which could result in a sizable tax bill.

Your required minimum distributions, known as RMDs, are based on your account balance at the end of the previous year divided by your life expectancy, as determined by IRS mortality tables. If you don’t take a distribution of at least the required amount, you’ll be hit with a stiff penalty: 50% of the amount you failed to withdraw. In most cases, you should save your tax-free Roth IRA distributions for last. Unlike traditional IRAs, Roth IRAs have no annual distribution requirement.   Should you have funds left over when you die, your heirs will thank you: Distributions from inherited Roth IRAs are tax-free; those from traditional IRAs are taxed at heirs’ ordinary income-tax rate.

Don’t be afraid to tap your Roth IRAs earlier as a way to increase your retirement income without being pushed into a higher tax bracket. The bottom line: Decide whose taxes you want to minimize — yours or your heirs’.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

When It’s OK to Tap Your IRA

You’ve been saving diligently for your retirement, but now you need some of that cash to cover today’s expenses. Can you get to it without incurring Uncle Sam’s tax wrath? In some instances, the answer is yes.

When you take money out of an individual retirement account before you reach age 59½, the Internal Revenue Service considers these premature distributions. In addition to owing any tax that might be due on the money, you’ll face a 10 percent penalty charge on the amount.

But there are times when the IRS says it’s OK to use your retirement savings early.  Two popular, penalty-free withdrawal circumstances are when you use IRA money to pay higher-education expenses or to help purchase your first home.

OK for School

When it comes to school costs, the IRS says no penalty will be assessed as long as your IRA money goes toward qualified schooling costs for yourself, your spouse or your children or grandkids.

You must make sure the eligible student attends an IRS-approved institution. This is any college, university, vocational school or other postsecondary facility that meets federal student aid program requirements. The school can be public, private or nonprofit as long as it is accredited.

Once enrolled, you can use retirement money to pay tuition and fees and buy books, supplies and other required equipment. Expenses for special-needs students also count. And if the student is enrolled at least half time, room and board also meet IRS expense muster.

First-Home Exemption

Then, there’s your home. Uncle Sam offers various tax breaks for homeowners. He’ll even bend the IRA rules a bit to help you get into your house in the first place.

You can put up to $10,000 of IRA funds toward the purchase of your first home. If you’re married, and you and your spouse are first-time buyers, you each can pull from retirement accounts, giving you $20,000 in residential cash.

Even better is the IRS definition of “first-time homebuyer.” Technically, you don’t have to be purchasing your very first abode. You qualify under the tax rules as long as you (or your spouse) didn’t own a principal residence at any time during the previous two years. In fact, you can even share your IRA wealth. The IRS says the first-time homebuyer using your IRA funds for a down payment can be you, your spouse, one of your children, a grandchild or a parent.

But be careful not to take out your money too soon. You must use the IRA funds within 120 days of withdrawal to pay qualified acquisition costs. This includes the costs of buying, building or rebuilding a home, along with any usual settlement, financing or closing costs.

Different Treatment for Roth

These home buying IRA options apply to traditional retirement accounts. The rules are a bit different if your nest egg is in a Roth IRA.

The $10,000 you take out for your first home is a qualified distribution as long as you’ve had your Roth account for five years. This means you can take out your retirement money without penalty, and because Roth earnings are tax-free, you’ll have no IRS bill, either.

If, however, you opened your Roth IRA less than five years ago, the withdrawal is an early distribution. As with a traditional IRA early withdrawal, a Roth holder can use the first-home exception to avoid the 10 percent penalty but might owe tax on earnings that are withdrawn.

You can reduce the tax bite by first withdrawing the already-taxed contributions you made to your Roth. In fact, the IRS has specific rules about the order in which you can take unqualified Roth distributions: contributions, conversions from traditional IRAs and earnings. Check Chapter 2 of IRS Publication 590, Individual Retirement Arrangements for details.

Military Exceptions

Members of the military reserves also can receive early IRA distributions without penalty. To qualify, the following conditions must be met:

Conditions:

• You were ordered or called to active duty after Sept. 11, 2001.

• You were ordered or called to active duty for a period of more than 179 days or for an indefinite period because you are a member of a reserve unit.

• The distribution is from an IRA or from an elective-deferral plan, such as a 401(k) or 403(b) plan or a similar arrangement.

In addition, the early distribution cannot be taken before you received your orders or call to active duty or after your active duty period ends.

Personnel eligible for this early withdrawal exception include members of the Army or Air National Guard; the Army, Naval, Marine Corps, Air Force or Coast Guard Reserves; and the Reserve Corps of the Public Health Service.

Allowable, But Not Preferable, Distributions

Early IRA withdrawals also are penalty-free in a few other instances. Unfortunately, most of these are hardship situations that no taxpayer wants to face.

Hardship circumstances for penalty-free withdrawals:

• Payment of excessive unreimbursed medical expenses.

• Payment of medical insurance premiums while unemployed.

• Total and permanent disability.

• Distribution of account assets to a beneficiary after you die.

You also can get IRS-approved early access to your nest egg if you take IRA money on a specific schedule. Known as substantially equal periodic payments, this method allows you to begin withdrawing from your IRA early as long as the amounts are determined by an IRS-calculated life expectancy table.

Finally, keep in mind that the early withdrawal exceptions do not eliminate your tax bill if you take the money out of a traditional IRA. Unlike Roth accounts where you eventually can withdraw your money tax-free, taxes are merely deferred on traditional IRAs. So when you take the money out of such an account, regardless of your age or the purpose of the withdrawal, you’ll owe your regular tax rate on the amount.

But the early withdrawal exceptions do protect you from paying the IRS more in penalty charges. To let the IRS know that you used the retirement money early for a tax-acceptable purpose, file Form 5329. When you report your withdrawal here, you’ll also enter a code, found in the form’s instructions, that lets the IRS know the distribution is penalty-free.

The information herein contained does not constitute tax advice.  Any final decisions or actions should not be made without first consulting a CPA or Accountant.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm.  Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.