IRAs and 401Ks

Ohio Medicaid changes “Aged Blind Disabled” Eligibility – Spouse’s Retirement Fund

Posted on November 10, 2016 by Jim Koewler — No Comments ↓

This week’s blog continues the discussion of the changes to Ohio Medicaid’s Aged, Blind and Disabled program coming in 2016-2017. The initial installment (April 28, 2016) provided an overview of the transition from the old system (following section 209(b) of the federal Medicaid law) to the new system (that will follow section 1634 of the federal Medicaid law.) The May 5, 2016 installment discussed the new income rules that will go into effect with the new eligibility system. The May 12, 2016 installment discussed setting up a Qualified Income Trust (aka Miller Trust) that will be necessary for people who need ABD Medicaid to help pay for long term care. The June 16, 2016 installment discussed the Ohio rules that describe how to use the Miller Trust each month. The June 23, 2016installment discussed the difficulty in understanding the need for a Miller Trust. The July 1, 2016 installment discussed the need to empty the Miller Trust account every month. The July 7, 2016 installment discussed the need to balance the Miller Trust with the desire to have health insurance. The July 15, 2016 installment discussed the confusing deposit rules for Miller Trusts. The July 21, 2016 installment discussed the changes that the Ohio Department of Medicaid made to the form Miller Trust document. The July 28, 2016 installment discussed whether income is supposed to go directly into the Miller Trust. The August 4, 2016 installment discussed Medicaid’s insistence that the transfers (or deposits) into the Miller Trust account be automatic. The August 11, 2016 installment discussed money that doesn’t actually reach the Medicaid-recipient that, nonetheless, counts as “income” for purposes of using a Miller Trust. The August 18, 2016 installment discussed the appearance that a person on long term care Medicaid has an increase in income when he/she stops paying Medicare premiums. The August 25, 2016 installment discussed the impact of tax withholding on certain income sources and the difficulty that the tax withholding creates for the Miller Trust. The September 2, 2016 installment discussed the limit placed on monthly costs of the Miller Trust. The September 9, 2016 installment discussed how Ohio’s Medicaid rules appear to count income tax refunds twice. The September 15, 2016 installment discussed the Ohio Department of Medicaid’s change in policy regarding real estate (other than the residence.) The September 22, 2016 installment discussed keeping the house with an intent to return to home. The September 29, 2016 installment discussed keeping the house while a dependent family member lives there. The October 6, 2016 installment discussed the home that is co-owned by someone else (other than the spouse.) The October 27, 2015 installment discussed real property that is “essential for self-support.” Today’s installment will discuss the retirement funds belonging to the spouse who does not seek Medicaid’s help with long term care costs.

Before July 31, 2016, when a married person asked for Medicaid’s help to pay for long term care, all assets (Medicaid calls them “resources”) of both spouses were counted when determining eligibility for Medicaid coverage. It didn’t matter whether the assets belonged to the spouse seeking coverage, or to the spouse who wasn’t seeking coverage, or to both of them jointly. After August 1, 2016, that changed for retirement funds belonging to the spouse who doesn’t need care UNDER CERTAIN CIRCUMSTANCES.

The exclusion of the spouse’s retirement account is set forth in the amended version of Ohio Administrative Code section 5160:1-3-05.20(E)(1) that took effect on August 1, 2016. It applies to retirement funds that are public pensions, private pensions, disability plans, defined benefit employer pension plans, employee stock ownership plans, 403b plans, money purchase pension plans, profit sharing pension plans, IRAs, KEOGH plans, Roth IRAs, SEP-IRAs, and 401k plans, as well as any other pension or retirement plans under sections 401, 403, or 408 of the federal income tax law. (Ohio Administrative Code section 5160:1-3-03.10(B))

Here’s the catch. The spouse’s retirement funds are excluded from the asset calculation for Medicaid eligibility only if the couple is living together.

When one of them needs long term care, a married couple will probably live together only if the person receiving care is receiving that care in the home (frequently called aging in place) or is receiving care in an assisted living community. A couple living together in a nursing home when one of them doesn’t need nursing home care is a extremely unlikely. For that matter, living together in assisted living when only one of them needs long term care is unusual.

Because of the “living together” requirement, this recent rule change seems to create an incentive for the couple remain in the home or in assisted living, both of which are less expensive for Medicaid than full nursing home care. That incentive to remain in a less expensive setting to receive long term care is all well and good as long as the home or assisted living can provide appropriate care. For many, if not most, people, the home or assisted living community may not be able to provide appropriate care for the rest of the person’s life. At some point, the person is likely to need to move into a nursing home.

If the spouse receiving Medicaid’s help for home care or assisted living care needs more care and moves into a nursing home to receive such care, then the spouse’s retirement funds are no longer exempt. The loss of this exemption will lead to the loss of Medicaid eligibility for the person who needs care.

The likelihood that the exemption of the spouse’s retirement funds is a temporary exemption creates a Catch-22 for the couple. They must either try to maintain the exemption for the retirement funds by remaining where they can live together, or, they must spend a potentially large portion of the retirement funds to to allow the provision of more care.

Legal Issues when someone has Dementia – Update Beneficiary Designations

Posted on July 31, 2015 by Jim Koewler — No Comments ↓

This week’s blog continues the discussion of Legal Issues when someone has Dementia. The introductory installment (April 30, 2015) put forth the issue of “Who can speak for someone with dementia?” The May 14, 2015 installment discussed the situation where the person with dementia has Advance Directives in place. The May 21, 2015 installment discussed the legal issues in determining whether a dementia sufferer can choose to have new Advance Directives prepared. The May 30, 2015 installment discussed options in preparing a Health Care Power of Attorney. The June 4, 2015 installment discussed how to decide whether to prepare a Living Will. The June 11, 2015 installment discussed some of the basic issues in preparing a General Power of Attorney. The June 18 installment discussed the importance of making the General Power of Attorney “durable.” The June 25 installment discussed the importance of NOT making the General Power of Attorney “springing.” The July 2 installment discussed revoking prior Powers of Attorney. The July 9 installment discussed Do Not Resuscitate orders. The July 16 installment discussed the Right of Disposition designation. The July 23 installment discussed the Will (or Last Will and Testament.) Today’s installment will discuss beneficiary designations on life insurance policies, IRAs, annuities, etc.

Today’s installment continues the discussion of issues to manage when someone finds out that he or she has a disease that causes dementia. These issues should be managed before the dementia gets worse, taking away the person’s ability to make decisions.

One of these decisions to make before the dementia gets worse is to decide who should be the designated beneficiaries on the person’s various financial accounts. Life insurance policies, IRAs, 401Ks, and annuities usually ask for beneficiaries to be named when the accounts are first set up. Bank accounts; investment accounts; real estate records; and auto, truck, boat, etc. title do not automatically ask for beneficiaries but may have beneficiaries (or an equivalent designation) added. Before the dementia gets worse, the person with dementia should visit/revisit the question of whom to name. Before the person with dementia loses the ability to remember whom he or she holds dear, he or she should look out for loved ones by naming beneficiaries or changing beneficiaries.

Starting with the accounts on which beneficiaries are usually listed, the person with dementia should see whom (if anyone) is designated as the beneficiary on life insurance policies, IRAs, 401Ks, (and any other similar retirement plans,) and annuities. The policy or account may have been set up long ago, perhaps before the person’s children were born and perhaps even before marriage or the establishment of a similar long-term relationship. If so, the beneficiary designations are probably inappropriate now. They should be updated.

On bank accounts, investment accounts (, non-tax-deferred accounts,) real estate, and auto/truck etc. titles, it may be possible to name beneficiaries, but the beneficiary designation may have a different name. It might be a Transfer on Death designation, or a Pay on Death designation. For real estate, it might be a Transfer on Death Deed or, like in Ohio now, a Transfer on Death Affidavit that contains instructions on preparing a deed to carry out the transaction to the designated beneficiary. Ohio auto title documents allow the designation of someone to get ownership of the automobile upon the death of the listed owner. Because boats, trucks, personal watercraft, trailers, and several other kinds of “rolling stock” use similar title records in Ohio, a Transfer on Death is allowed for these boats, trucks, etc. as well. (Automobile titles are covered by state law, so other states may or may not have allow the designation of a new owner for rolling stock in the way that Ohio allows.) It’s always a good idea to consider using the available beneficiary designations (by whatever name.) It’s an especially good idea to use them or to confirm them when dementia has started.

When the person with dementia looks at his or her beneficiary designations, no changes may be needed. Perhaps he or she kept up with changing family circumstances. Most people don’t keep up with those changes, though.

An account or policy or real estate holding, etc. may have been opened or created when the person with dementia was a young adult. (For ease of discussion, we’ll just refer to everything as an “account” for the rest of this discussion.) The account may designate a parent as the beneficiary. The parents may have passed away. The person with dementia may have a spouse or other long term relationship. He or she may have children or grandchildren. The older the account, the more likely that a beneficiary update is necessary.

The person with dementia may previously have named a spouse as beneficiary on some or all of the accounts. The spouse may have passed away. The spouse may be in long term care and may have Medicaid coverage or VA benefit coverage. If any of these have occurred, the beneficiary designation may need changed away from the spouse.

If a child or grandchild (or anyone else, for that matter) is named as beneficiary and that person has his or her own disability or medical difficulties, the child/grandchild may not be an appropriate choice as a beneficiary. If he or she receives government benefits (like Medicaid, SSI, or VA benefits) because of the disability or medical challenges, the arrival of new money (or anything else of value) might suspend the government benefits until the newly arrived asset is exhausted. That loss of government benefits is a net financial loss to the family.

A future installment in this series will discuss working with an elder law attorney. The elder law attorney may have suggestions on beneficiary designations that come from the experience helping people who need long term care. Those suggestions may be different than the choices the person with dementia would have made by himself or herself.

In summary, when someone learns that he or she is suffering from an early stage of dementia, he or she should look at where he or she has or can designate beneficiaries to receive assets upon the person’ death (in addition to following the other suggestions made within this ongoing discussion.) The person should take the opportunities to name beneficiaries where they have not been beneficiaries before. The person should also make sure that the already-completed beneficiary designations are still the appropriate ones. As the person with early-stage dementia should realize, circumstances can change. Some plans may have to be changed to keep up.

IRAs and 401Ks – What if your state’s Medicaid doesn’t count them?

Posted on April 24, 2014 by Jim Koewler — No Comments ↓

This is the sixth post about IRAs and 401Ks. My prior five posts have discussed how, when, and why to withdraw money from your IRA (or 401K, or 403B, or MyRA, when it arrives, or any other tax-deferred account.) See “IRAs and 401Ks are not for tax avoidance. They are for tax timing” from March 20, 2014, “IRAs and 401Ks – Withdrawing Money Too Slowly” from March 27, 2014, IRAs and 401Ks – Withdrawing Money Too Quickly from April 4, 2014, IRA and 401k Withdrawal Strategy – Don’t be Stupid about It from April 11, 2014, and IRAs and 401Ks and the Risk of Long Term Care from April 18, 2014. (As I’ve done before, I’ll call them all IRAs, but the discussion will apply to 401Ks, 403Bs, and even MyRAs (assuming that they act like IRAs when the rules eventually get written,) and other tax deferred accounts, except perhaps Roth IRAs.) This week, I want to discuss what to do if you live in a state, like California or Florida, that doesn’t count your IRA as an “asset” for Medicaid purposes.

If you need long term care in a state that doesn’t consider your IRA during the Medicaid application process, you shouldn’t just assume that all is well. There may be conditions of state law or rules that, over the long run, will use up or take the IRA. There also may be advantages in dealing with the IRA up front.

Caveat: I have made no attempt to learn the various states’ laws other than what I’ve picked up from chance discussions with other elder and special needs law attorneys. I don’t make enough money in journalism to undertake a comprehensive investigation. (Actually, I make no money in journalism.) I practice law only in Ohio, helping seniors who need long term care and people with special needs according to Ohio law and federal law.

Your state might ignore your IRA as an asset only if it is paying out as income. If so, it might be more advantageous to call the IRA an asset and use the tax payment as part of the spend down to reach the asset level necessary for Medicaid eligibility.

Your state might ignore your spouse’s IRA while your spouse is still working. If, however, your spouse stops working, the IRA could suddenly become an asset, and your Medicaid coverage could stop until the IRA money is spent. A plan for when your spouse stops working is in order.

Your state might ignore your IRA while you’re alive but go after the money in the IRA as part of the “estate recovery” proess after you’ve passed away. (When seniors talk about “losing the house to Medicaid,” the estate recovery process is probably what they mean, even if they don’t fully understand it.) The estate recovery process can reach more assets than just the house and might include the IRA.

Regardless of your state’s Medicaid rules, you should consider whether you could possibly qualify for VA Pension. (Visit the Veterans tab on my website to learn more.) Pension is not available for veterans or their surviving spouses to too many assets. Even if Medicaid wouldn’t count your IRA, you might need to think ahead about possibly qualifying for VA Pension.

Regardless of your state’s laws and possible VA benefits, it might be more financially advantageous to make the IRA withdrawal at the time you need long term care rather than waiting to pass the IRA to your beneficiaries. (I suspect this is true more for a married couple where one spouse needs long term care than it is for a single people who needs care.)

So, if your state doesn’t count your IRA as an “asset” during the Medicaid eligibility decision, you should CONSULT AN ELDER LAW ATTORNEY. There are too many variables to consider at a time when you and your family have to deal with long term care decisions. It’s too easy to make a decision that seems right in the short run but could have negative consequences over a long period of time.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs or special needs planning,
call Jim or contact him through his website.

IRA and 401k withdrawal strategy – The Condensed Version

Posted on April 24, 2014 by Jim Koewler — No Comments ↓

This is the seventh, and (until I think of something else to say on the topic) last post in the series on IRA and 401k withdrawal strategy. Please remember, that, while there are tax reasons to withdraw from your IRA and 401k in the early years of your retirement, my main focus (as an elder law attorney) is on how to avoid the extra cost of taxes that results from having significant money in your IRA or 401k at the time that you need long term care.

My prior six posts have discussed how and why to withdraw money from your IRA or 401K, or 403B, or MyRA (when it arrives) or any other tax-deferred account. See “IRAs and 401Ks are not for tax avoidance. They are for tax timing” from March 20, 2014, “IRAs and 401Ks – Withdrawing Money Too Slowly” from March 27, 2014, IRAs and 401Ks – Withdrawing Money Too Quickly from April 3, 2014, IRA and 401k Withdrawal Strategy – Don’t be Stupid about It from April 4, 2014, IRAs and 401Ks and the Risk of Long Term Care from April 17, 2014, and IRAs and 401Ks – What if your state’s Medicaid doesn’t count them? from April 24, 2014. (As I’ve done before, I’ll call them all IRAs, but the discussion will apply to 401Ks, 403Bs, and even MyRAs (assuming that they act like IRAs when the rules eventually get written,) and other tax deferred accounts, except perhaps Roth IRAs.) After spending weeks on the “why” and “when” and the details of “how” to manage IRA withdrawals after retirement, I want to conclude the series with a short, bullet-pointed summary. You might think of this as the “IRA Withdrawal To Do List.”

Please do not take these posts as advice not to have an IRA. My posts focus on when and how to take the assets out.
After you retire, if your living expenses are higher than your income, take money out of your IRA rather than out of your already taxed assets outside the IRA.
As the end of a year approaches, take additional money out of your IRA to put yourself near the top of the 15% federal tax bracket. (If you’ve got a large IRA, then aim for the top of the 25% bracket.)
In any event, aim to have the IRA emptied within 10 years (even if it means getting into a tax bracket higher than 25%.) Your risk of long term care goes up each year, and really goes up after 75 or 80 years old. Try to have your IRA empty before that risk gets high. (Even if you’re not worried about long term care costs, I have provided plenty of tax reasons in the past weeks to justify systematic IRA withdrawals.)
If you live in a state that doesn’t count IRAs as assets for Medicaid purposes, talk to an elder law attorney. The exclusion of IRAs from Medicaid calculations may not be as black and white as you think. In addition, if you could qualify for VA Pension, the IRA value may prevent you from getting benefits. Finally, the tax reasons to deplete your IRA before your death apply no matter where you live.
If you didn’t or can’t empty your IRA before you or your spouse needs long term care, don’t try to outsmart Medicaid or the VA. They’ve done a lot more of these than you. You’ll probably come out behind.
Also, if you didn’t or can’t empty your IRA before you or your spouse needs long term care, don’t panic and empty it right away. Talk to an elder law attorney before making any drastic moves.
Finally, If you need long term care (whether you have an IRA or not,) seek out an elder law attorney that works with people who need long term care. Don’t settle for just any attorney, and don’t believe that experience with wills, trusts, and probate is the same thing as elder law. A good elder law attorney may be able to help protect some (perhaps many) of your assets.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs or special needs planning,
call Jim or contact him through his website.

IRAs and 401Ks and the Risk of Long Term Care

Posted on April 17, 2014 by Jim Koewler — No Comments ↓

My prior four posts have discussed how to withdraw money from your IRA (or 401K, or 403B, or MyRA, when it arrives, or any other tax-deferred account.) See “IRAs and 401Ks are not for tax avoidance. They are for tax timing” from March 20, 2014, “IRAs and 401Ks – Withdrawing Money Too Slowly” from March 27, 2014, IRAs and 401Ks – Withdrawing Money Too Quickly from April 4, 2014, and IRA and 401k Withdrawal Strategy – Don’t be Stupid about It from April 11, 2014. (As I’ve done before, to protect my poor tired typing fingers, I will call them all IRAs, but the discussion will apply to 401Ks, 403Bs, and even MyRAs (assuming that they act like IRAs when the rules eventually get written,) and other tax deferred accounts, except perhaps Roth IRAs.) This week, I want to discuss why I, an elder law attorney, not a financial advisor, write (and worry) so much about IRAs.

LONG TERM CARE (the usual focus of elder law practice) is why I worry about IRAs.

As an elder law attorney, I help seniors (and sometimes non-seniors who have a disability) get long term care without losing their entire life savings. I sometimes describe my job as helping people avoid a complete “financial bleed out” from the costs of long term care. While I am preventing a financial bleed out, I also want to minimize losses of money to other expenses. I often call these other expenses “financial leaks.”

One big financial leak is a big income tax payment triggered by a sudden withdrawal from an IRA. That big tax leak is why I’ve spent the last several weeks writing about IRAs.

When someone needs long term care, their cost of living shoots through the roof. In northeast Ohio where I live, the room and board cost (just the room and board) for a nursing home is usually between $6,500 and $9,500 per month. That’s not counting prescriptions, doctor visits, incontinence supplies, and other non-room and board costs. Costs for in-home care or for assisted living are not as high as for a nursing home, but in-home care and assisted living costs are still usually much higher than the patient’s/resident’s monthly income. These long term care costs eat away (in small bites or in big mouthfuls) at a senior’s savings.

Many people use Medicaid (which has a different name in some states, like Medi-Cal or MaineCare) or VA Pension (more commonly known as Aid and Attendance) to help pay for long term care. Both of these programs are available only to people with few assets. (For Medicaid, it’s almost no assets.) In most states, an IRA is counted as part of the assets. (I understand that Florida and California do not include IRAs in the asset count. I suspect that a few other states also exempt IRAs and other retirement savings accounts. Ohio, where I work, counts IRAs as assets.)

When the IRA is counted as an asset, it must be depleted or reduced to help the senior qualify for Medicaid or VA Pension. (An elder law attorney can help many seniors protect some of their assets, including contents of the IRA, but rarely can the money stay in the IRA and be protected. It must usually come out.) So, either with a spend-down to pay for long term care or an elder law attorney’s asset protection plan to shield some of the senior’s money, the IRA must usually be depleted or reduced quickly. That means a big tax hit in one year (similar to what I describe in IRAs and 401Ks – Withdrawing Money Too Quickly from April 4.) That’s a big financial leak that I try to help clients avoid.

And don’t try to be too smart about it. Don’t expect that you can manage the IRA withdrawals to spread out the taxes over several years. You won’t be able to get Medicaid. The contents of the IRA will make you too “rich” to get Medicaid.

(Spreading out withdrawals over years might work for VA Pension because the asset amount that VA applicants can keep is much higher than Medicaid allows. VA Pension rarely provides enough money for a nursing home stay, though. It’s great for assisted living and for in-home care, but you’ll probably want Medicaid for a nursing home.)

You also probably won’t want to turn the IRA contents into an annuity and take it as income over a long period of time (unless you’ve got significant assets outside the IRA that you are trying to protect.) In most states (including Ohio,) your income must be paid toward your care before Medicaid will cover you. So, that monthly annuity payment that you set up inside the IRA to avoid paying taxes will be lost to your long term care costs. You’re paying the nursing home rather than the tax man, but you’re still losing the money. It’s usually better to take the tax hit in year one and let an elder law attorney help you shelter what’s left after taxes.

In short, money in an IRA is a ticking time bomb as you get older past retirement. The costs of long term care are bad enough. If, because of poor planning or bad luck, you still have an IRA when you need long term care, the tax payments will make the financial loss that much bigger.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs or special needs planning,
call Jim or contact him through his website.

IRA and 401k Withdrawal Strategy – Don’t be Stupid about It

Posted on April 4, 2014 by Jim Koewler — No Comments ↓

My prior three posts have discussed how to withdraw money from your IRA (or 401K, or 403B, or MyRA, when it arrives, or any other tax-deferred account.) See “IRAs and 401Ks are not for tax avoidance. They are for tax timing.” from March 20, 2014, “IRAs and 401Ks – Withdrawing Money Too Slowly” from March 27, 2014, and IRAs and 401Ks – Withdrawing Money Too Quickly from April 4, 2014. (As I’ve done before, to preserve what little sanity I have, I will call them all IRAs, but the discussion will apply to 401Ks, 403Bs, and even MyRAs (assuming that they act like IRAs when the rules eventually get written,) and other tax deferred accounts, except perhaps Roth IRAs.) (As before, I will ignore state and local taxes because there is so much variation among them.) This week, I want to discuss some special circumstances that might require an adjustment of my earlier advice for particular situations and also to discuss what to do with the money after you withdraw it from the tax-deferred account.

First, why be so systematic about withdrawals? Steady withdrawals from an IRA that are measured by tax brackets are like investing in the market with a dollar cost averaging approach. With dollar cost averaging, you invest the same amount of money every month or every quarter. By investing the same amount of money each time, you get more shares when share prices are low and fewer shares when share prices are high. Over time, you build up a significant position in the market with a lower-than-average cost per share. Applying the same theory to IRA withdrawals, you can withdraw a significant amount of previously-untaxed money and pay lower-than-average taxes on the withdrawals by stretching them out over time and watching the tax brackets (and watching your other income as well.) You aren’t necessarily trying to withdraw the same exact amount each year. Instead, you are trying to have your money in the same tax brackets each year.

Second, aim for the 15% tax bracket as much as possible. The next tax bracket is 25%. That 10% jump will be a big bite out of your savings. No other tax bracket is more than 5% above the bracket below. (If your IRA is less than $100,000 and you’re still a young retiree, then aim for the 10% bracket.) If you’ve got more than $400,000 in your IRA you’re probably going to have to pay 25% on some of your withdrawals, or you can stretch it out farther than 10 years, but your risk of needing long term care (and having to do something drastic with your IRA) goes up significantly as you get older. If you’ve got millions of dollars in the IRA, you’re going to take a bigger tax hit, but you knew that. (You’ll still have millions of dollars though, just not as many millions.) If you’re Jack Dorsey, Warren Buffett, or Bill Gates, you’ve got plenty of advice from others (and, because you’re not in Ohio, you weren’t going to be my clients anyway.)

Third, you can make much larger withdrawals as a married couple (twice as large in the 10% and 15% brackets.) Don’t wait until your spouse has passed away to start IRA withdrawals.

Fourth, if an IRA investment has a penalty attached to it for early surrender (other than the taxes on the withdrawal,) wait until the penalty is gone (or at least is low.) For example, if you’ve invested in an annuity inside the IRA, and the annuity has a 12% surrender charge, don’t surrender the annuity (unless you have other reasons to make the IRA withdrawal.) KEEP IN MIND, though, that many annuities that have surrender charges still allow a withdrawal of a certain percentage (10% is what I hear most often.) of the principal each year without penalty. If your annuity has that option, use it.

Fifth, don’t let small transaction costs freeze you into inaction. You’ll probably have some transaction costs. They go with investing. They are small, though, compared to the tax hit you or your family will take if you handle IRA withdrawals unwisely. (If you’ve got big transaction costs, please consider my discussion above about surrender charges. Also, if you have big transaction costs, I sure hope that investment is giving you a big return.)

Sixth, now that you’ve made a withdrawal, what do you do with the money? Use what you need for your expenses, and invest the rest. Yes, I know it was invested before the withdrawal, and it seems illogical to move the money and then simply reinvest it. Still, reinvesting (even in the same investment as you had inside the IRA, if you like that investment) is not as illogical as you might think (even with transaction costs.) You’re making the withdrawals for a combination of good tax planning and an effort to get the withdrawals completed before the risk of long term care gets high. You still have a long life ahead and will need most or all of that money to support yourself. Now, though, each dollar you’ve got invested is worth a dollar. In the IRA, each dollar was only worth 90¢ or 85¢ or 75¢, or even less. It still needs to be invested and grow. Now, though, only the growth will be taxed, not the principal.

Overall, try to be smart about implementing my suggested strategy of withdrawing over 3 to 10 years. Don’t be “penny wise and pound foolish.”

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.

IRAs and 401Ks – Withdrawing Money Too Quickly

Posted on April 3, 2014 by Jim Koewler — No Comments ↓

My prior two posts have discussed how to withdraw money from your IRA (or 401K, or 403B, or MyRA, when it arrives, or any other tax-deferred account. ) See “IRAs and 401Ks are not for tax avoidance. They are for tax timing.” from March 20, 2014 and “IRAs and 401Ks – Withdrawing Money Too Slowly” from March 27, 2014. (As I’ve done before, to preserve what little sanity I have, I will call them all IRAs, but the discussion will apply to 401Ks, 403Bs, MyRAs (I assume, subject to seeing the rules when they get written,) and other tax deferred accounts, except perhaps Roth IRAs.) This week, I want to continue the discussion to consider the consequences of withdrawing money from an IRA too quickly.

It’s simple. Too quick an IRA withdrawal will cost you more in taxes. In a sort-of mirror image of too slow a withdrawal, in which your family will pay more in taxes, too fast a withdrawal will cost YOU more in taxes.

Your guide to how quickly (and, at the same time, how slowly) to withdraw from your IRA is the federal system of tax brackets. (I’m ignoring state taxes in this discussions because there are too many variations among the states.)

The tax brackets are the guide because they are graduated. For 2014, the tax brackets look like this:

Rate	Single Filers	Married Joint Filers	Head of Household Filers
10%	$0 to $9,075	$0 to $18,150	$0 to $12,950
15%	$9,076 to $36,900	$18,151 to$73,800	$12,951 to $49,400
25%	$36,901 to $89,350	$73,801 to $148,850	$49,401 to $127,550
28%	$89,351 to $186,350	$148,851 to $226,850	$127,551 to $206,600
33%	$186,351 to $405,100	$226,851 to $405,100	$206,601 to $405,100
35%	$405,101 to 406,750	$405,101 to 457,600	$405,101 to $432,200
39.6%	$406,751+	$457,601+	$432,201+

(From http://taxfoundation.org/article/2014-tax-brackets)

So, any single person making more than $406,751 is in the 39.6% tax bracket. Remember, though, that the taxpayer is NOT paying 39.6% of all of his or her income. He or she pays 10% on the first $9,075 of income, 15% on the income between $9,076 and $36,900, 25% on the income between $36,901 and $89,350, etc.

So, if your income is $50,000 (after deductions, etc.,) you’ll pay $907.50 (for the first $9,075 of income) plus $4,173.75 (on the income between $9,075 and $36,900) plus $3,275 (on the income between $36,900 and $50,000,) for a total of $8,356.25. Jack Dorsey (the founder of Twitter and Square) pays the same taxes on the first $50,000 of his income. He just has additional income above that first $50,000, some of which is taxed at 25%, some taxed at 28%, some taxed at 33%, etc. Although a sizable amount of Mr. Dorsey’s income is taxed at 39.6 percent, some of it is not. (I’d have used the more recognizable (to me, anyway) billionaires Warren Buffett or Bill Gates, but they’re both married and, therefore, in a different set of brackets than our hypothetical taxpayer who is single.)

So, how does this graduated tax system help you choose how much to withdraw from your IRA? The key is to stay close to a bracket cut-off amount. (It’s okay to be a little over or a little under, but try to stay close.)

So, let’s say you have a $300,000 IRA at the time you retire. You can withdraw $30,000 a year for 10 years and (depending on your other income) stay in the 15% tax bracket the whole time. (You may have to adjust your annual withdrawals now and then to account for growth inside your IRA and income outside the IRA as more assets are held outside.) Ignoring revisions in the tax brackets (because I don’t want to get that fancy, nor do I want to make economic projections on inflation, etc.,) a 10-year withdrawal would cost $31,397.25 in taxes.

Because you can take an IRA withdrawal late in the year, you can know what your other income is for the year, and take enough out of your IRA to get right up to the $36,900 bracket cut-off and give yourself a buffer in later years for income growth.

If you took that same $300,000 out of the IRA in 3 years, that would mean $100,000 withdrawn each year, resulting in taxes of $67,606.62 because lots of the money is in higher tax brackets. If you did the withdrawal in one year, the taxes would be $82,858.25. (Boy, I hope I did the math correctly on all of those.)

The key is to find the balance of haste (to avoid tax losses to your heirs) and patience (to minimize your own tax losses) on your IRA withdrawals by considering the size of your IRA, your other (non-IRA) income, your age at the time you start systematic withdrawals, and then stay close to the tax bracket cut-off that makes the most sense.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.

IRAs and 401Ks – Withdrawing Money Too Slowly

Posted on March 27, 2014 by Jim Koewler — No Comments ↓

Last week, I explained that IRAs (and 401Ks, and 403Bs, and, I assume, the new MyRAs) help people time their taxes but not avoid taxes altogether. (IRAs and 401Ks are not for tax avoidance. They are for tax timing.) (Like I did last week, I’ll write about IRAs, but I mean to include 401Ks, 403Bs, etc. I just don’t want to repeat all of the different names for these accounts over and over in my writing.) I tried to explain how to withdraw the assets of the your tax-deferred account over 3 to 10 years (depending on the size of your IRA.) To clarify my advice, I want to consider how keeping too much money in your IRA can cost you or your family more in taxes.

Many people take out the Required Minimum Distribution (“RMD”) and no more. That RMD is calculated to have the IRA last as long as your life expectancy, i.e., the “average” life expectancy for someone 70 1/2 years old. (Roth IRAs do not have the same RMD requirements.) A life expectancy pay-out makes sense because IRAs were created to support retired people during their retirement to the end of their lives. IRAs were not created as a way to pass money to a retiree’s children and grandchildren (assuming that is who most retirees will name as their IRA beneficiaries.) The money in the IRA is supposed to be used up before you die — if you’re the “average” person with an “average” lifespan.

If you have better than average investments that provide more growth or income than “average,” your RMD won’t empty your account before your life expectancy. A well-invested IRA will leave money to your beneficiaries.

Similarly, if you die before your life expectancy (i.e., you’re unhealthier or unluckier than the “average” person,”) your IRA will still have money in it because you didn’t reach your life expectancy. Your beneficiaries will get your left over IRA money.

So, why is it bad if your children or grandchildren get money from your IRA? It’s bad because of taxes, of course. The beneficiaries of your IRA will have to pay the taxes on the IRA money. They can choose to spread out the payments (like an RMD) and, as a result, spread out the taxes the same way that I suggest you spread them out. Even with spread out payments, though, your beneficiaries will probably pay more taxes than you would have paid.

Your beneficiaries will probably pay more in taxes because, after your death, your beneficiaries will probably be in a higher tax bracket than you were before your death. Your children may still be working at the time of your death. Your grandchildren will almost certainly be working at the time of your death. The added income from your IRA will get taxed at your children’s or grandchildren’s top tax rate or maybe even push them into a higher tax bracket.

For example, you might be in the 15% tax bracket during retirement. (I’m not including state taxes in this discussion. There’s too much variation.) One dollar in your IRA is worth 85 cents to you after withdrawal. At the same time, your still-working children and grandchildren could easily be in the 25% tax bracket. Someone in the 25% tax bracket receiving one dollar of your IRA will get only 75 cents after taxes. That’s an extra 10% loss in money because you left untaxed money to someone with a higher income than yours. That extra tax loss will be worse for children and grandchildren in the 28%, 33%, 35%, and 39.6% tax brackets.

Unless your children and grandchildren are in the same or lower tax bracket as you (and stay in that tax bracket for the foreseeable future,) your family will lose more money from your IRA if you leave it behind than you would lose if you withdrew it yourself. And it’s rare for a children and grandchildren to be in lower tax brackets than their retired parents and grandparents.

In addition, tax rates are (from a historical perspective) pretty low right now. It’s likely that the tax rates will be higher in a few years. Money withdrawn now will have the benefit of today’s low tax rates. Money withdrawn (by you or by your children or grandchildren) after rates go up will be taxed at those higher rates.

So, I repeat my advice: Take your money out of your IRA during the first 3 to 10 years after retirement. Don’t leave money in your IRA to your heirs. Leave them money outside your IRA instead. If you manage the withdrawal of your IRA, the whole family will lose less money overall to taxes.

For more information visit www.ProtectingSeniors.com

Jim Koewler’s mission is
Protecting a Senior’s Life Savings™
from the costs of long term care

For help with long term care costs, call Jim
or contact him through his website.

IRAs and 401Ks are not for tax avoidance. They are for tax timing.

Posted on March 20, 2014 by Jim Koewler — No Comments ↓

The money in your IRA and 401K hasn’t been taxed yet. (A few special IRAs contain already-taxed money, but those are not the subject of today’s post.) SOMEONE IS GOING TO PAY TAXES ON THAT MONEY. If you come to realize that retirement savings accounts (IRAs, 401Ks, 403Bs, etc.) help you time taxes but do not help avoid taxes, you and your family will lose less of that money to taxes.

(I’ll call them IRAs for the rest of the post so I can save my typing fingers and my sanity. My comments still apply equally to 401Ks, 403Bs, etc.)

The power of an IRA lies in the ability it gives you to choose when you will take the money out and pay the income tax on the withdrawn money. The ideal strategy is to start taking money out when your non-IRA income drops after you stop working. For most people, that time is when they retire. (For people with deferred compensation packages, the ideal time is after the deferred compensation ends.) Except for IRA money that you need during the year to sustain your lifestyle, you should look at your income near the end of each year and then withdraw from your IRA the amount of money that will increase your income up close to the top of the tax bracket. If your IRA has lots of money, you may want to withdraw enough to take you close to the top of the next tax bracket.

Your aim is to take withdrawals over a period of years (somewhere between 3 and 10 years, depending on how big your IRA is when you retire) so that the income is spread out over time, and your annual income in any one year doesn’t jump into a much higher tax bracket. Better to be in a lower tax bracket for several years running than to be in a high tax bracket in even one year.

You don’t want to stretch the payments out over your life expectancy because, as you age, the risk of long term care goes up. When you need long term care, you may be forced to withdraw from your IRA all at once, so you’ll want to have your IRA low or empty before your risk of long term care gets too high. (Remember, I’m in Ohio. If you’re in a state like Florida that doesn’t count IRAs as assets when applying for Medicaid, you may want to keep your IRA intact as long as possible.)