9 Ways to Master Your Money

How_to_Master_Money1. Set Specific Goals

Saving tends to be easier when you have a certain purpose in mind: Saving for your first house, retirement at a certain age, a child’s college education, or even a trip around the world. The important thing is to be specific.

To develop a sound plan, these goals must have both a time frame and a dollar amount. Once you have listed and quantified your goals, you need to prioritize them. You may find, for example, that saving for a new home is more important than buying a new car.

Whatever your objective, be specific. Figure out how many weeks or months there are between now and when you want to reach your target. Divide the estimated cost by the number of weeks or months. That’s how much you’ll need to save each week or month to have enough money set aside. Remember, a goal is a dream with a deadline.

2. Pay Yourself First

Save and invest 5-10% of your gross annual income. Of course, this can be much harder than it sounds. If you’re currently living from paycheck to paycheck without any real opportunity to get ahead, begin by creating a solid budget after tracking all monthly expenses.

Once you figure out how you can control your discretionary spending, you can then redirect the money into a savings account. For many people, a good way to start saving regularly is to have a small amount transferred automatically from their paycheck to a savings account or mutual fund. The idea: If you don’t see it, you don’t miss it.

3. Maintain An Emergency Fund

Before you commit your newfound savings to volatile and hard-to-reach investments, make sure you have at least three to six months’ worth of expenses saved in an emergency fund to see yourself through difficult times. Keeping it liquid will ensure that you don’t have to sell investments when their prices are down, and guarantee that you can always get to your money quickly.

If you have trouble deciding how much you need to keep on hand, begin by considering the standard expenses you have in a month, and then estimate all the expenses you might have in the future (possible insurance deductibles and other emergencies). Generally, if you spend a larger portion of your income on discretionary expenses that you could cut easily in a financial crisis, the less money you need to keep on hand in your emergency account. If you have dependents, you’d want to keep more money in your emergency fund to offset the greater risk.

4. Pay Off Your Credit Card Debt

If you’re trying to save while carrying a large credit card balance at, say, 19.8%, realize that paying off the debt is a guaranteed return of nearly 20%. Once you pay off your credit cards, use them only for convenience, and pay off the balance each month. If you tend to run up credit card charges, get rid of the plastic and go back to using cash.

5. Insure Your Family Adequately

A major lawsuit, unexpected illness or accident can be financially devastating if you lack proper insurance. The key to insurance is to cover only financial losses so large that you could not cope with them and remain financially fit. If someone is dependent on your income, you need adequate life insurance. Long-term disability coverage is important as long as you need employment income. Also, be sure to carry adequate liability coverage on your home and auto policies.

To save on annual premiums, it might be feasible for you to raise your insurance deductible, or eliminate dual coverage. And whenever purchasing insurance – life, home, disability, or auto – be sure to shop around, and buy only from a reputable firm.

6. Buy A Home

Since 1968, the median price of single-family homes has gone up 300%; many houses still appreciate at a rate of 6% to 8% annually. Further, homeownership entitles you to major tax breaks. Interest on first and second home mortgages is fully deductible, meaning Uncle Sam helps subsidize your property investment. Additionally, the equity in your home can be a great source of retirement income.

Through a reverse mortgage, homeowners can access the equity in their home without having to sell, and have the option of receiving monthly income for life (or chosen term) or opening up a credit line against the home’s value.

7. Take Advantage Of Tax-deferred Investments

If your employer has a tax-deferred investment plan like a 401(k) or 403(b), use it. Often, employers will match your investment. Even if they don’t, no taxes are due on your contributions or earnings until you retire and begin withdrawing the funds. Tax-deferred savings means that your investments can grow much faster than they would otherwise. The same is true of IRAs, although the maximum amount you can invest annually in an IRA is substantially less than what you can put in a 401(k) or 403(b).

8. Diversify Your Investments

When it comes to managing risk to maximize your return, it pays to diversify. First you need to diversify among the three major asset classes: cash, stocks and bonds. Once you have decided on an allocation strategy among these three investment classes, it is important to diversify within each asset. This means buying multiple stocks within a variety of industries and holding bonds of varying maturities. Simply put, don’t put all your eggs in one basket. Also, don’t make the mistake of putting most or all of your money in “safe” investments like savings accounts, CDs and money market funds. Over the long haul, inflation and taxes will devour the purchasing power of your money in these “safe havens”.

All investments involve some trade-off between risk and return. Diversification reduces unnecessary risk by spreading your money among a variety of investments. Aside from diversification, the single most effective strategy is to invest continuously over time, with a long-term perspective.

9. Write A Will

The simplest way to ensure that your funds, property and personal effects will be distributed according to your wishes is to prepare a will. A will is a legal document that ensures that your assets will be given to family members or other beneficiaries you designate. Having a will is especially important if you have young children because it gives you the opportunity to designate a guardian for them in the event of your death. Although wills are simple to create, about half of all Americans die intestate, or without a will. With no will to indicate your wishes, the court steps in and distributes your property according to the laws of your state. If you have no apparent heirs and die without a will, it’s even possible that the state may claim your estate.

To begin, take an inventory of your assets, outline your objectives and determine to which friends and family you wish to pass your belongings. Then, when drafting a will, be sure to include the following: name a guardian for your children, name an executor, specify an alternate beneficiary and use a residuary clause which typically reads “I give the remainder of my estate to …” Once your will is drafted, you won’t have to think about it again unless your wishes or your financial situation change substantially.

© Copyright Balance

Ten Ways to Become Financially Independent

financialindependenceAfter the 2008 economic crisis, many people assumed they would never be able to reach true financial independence—the ability to live comfortably off one’s savings and investments with no debt whatsoever. However, individuals willing to use their time horizon to plan and adjust their spending, savings and investment behaviors might just find financial independence is possible. Here are 10 ideas to get started.

1. Visualize first, then plan.

Start by considering what your vision of financial independence actually looks like—and then get a reality check. Qualified financial experts can examine your current financial circumstances, listen to what financial independence means to you and help you craft a plan. The path to financial independence may be considerably different at age 20 than it is at age 50; the more time you have to save and invest generally produces a better outcome. But at any age, start with a realistic picture of your options.

2. Budget.

Budgeting (http://www.practicalmoneyskills.com/budgeting/)—the process of tracking income, subtracting expenses and deciding how to divert the difference to your goals each month—is the essential first task of personal finance. If you haven’t learned to budget, you need to do so.

3. Spend less than you earn.

It might be obvious, but it’s one of the most difficult financial behaviors to execute. Adhering to a lower standard of living and expenses will help you put more money into savings and investments sooner.

4. Build smarter safety nets.

Emergency funds and insurance are rarely discussed in combination. The traditional definition of an emergency fund is a separate account for cash that can be used instead of credit to repair a broken appliance or other expense that may run a few hundred dollars. However, many people keep insurance deductibles high to keep premiums low. Would you have enough cash on hand to cover an insurance deductible if you had a sudden claim? If not, build your deductible amounts into your emergency fund.

5. Eliminate debt.

Though consumer debt levels have generally fallen since the 2008 financial crisis, the Federal Reserve Bank of New York reported in February that home, student loan, auto and credit card debt began creeping up again in 2014. Getting rid of revolving, non-housing debt (http://www.practicalmoneyskills.com/costofcredit) is one of the most effective ways to free up money for savings and investment.

6. Consider your career.

Financial independence doesn’t require you to quit a career you love, but you really can’t get to financial independence without steady income to fuel savings and investments that will build over time. Speak with qualified advisors about your income, benefits and retirement picture first, and see if you might be able to expand your sources of work-related income, such as consulting part time. Also keep in mind that over the age of 50, the Internal Revenue Service allows you to make catch-up contributions (http://www.irs.gov/Retirement-Plans/Plan-Participant,-Employee/Retirement-Topics-IRA-Contribution-Limits) to both 401(k) and IRA accounts.

7. Downsize. 

You’ll generally reach wealth financial goals faster if you can cut your overall living expenses. For some, that means selling your home and moving to a smaller one or to an area with lower living costs and taxes. You can also sell or donate property you don’t need and use those proceeds to extinguish debt or add to savings or investments.

8. Invest frugally.

Become a student (http://www.dol.gov/ebsa/publications/undrstndgrtrmnt.html) of investment fees and commissions because they can cut significantly into your principal. Make a full evaluation of fees you are paying on every investment account you have and if you’re working with a licensed professional who sells you financial products, know what fees they’re charging for their investment and advisory services.

9. Buy assets that generate income.

Stocks, real estate, collectibles or cash investments all have up and down markets. But do your homework and focus on investments bought at attractive prices that are likely to appreciate over time. Also, don’t forget to study the tax ramifications of any investment transaction you make.

10. Always know where you are financially.

Financial planning isn’t about making one set of financial decisions and assuming you’re set. Lives and situations change and your financial planning must be flexible enough to withstand both positive and negative changes without derailing your hopes for financial independence. If your forte is not investment, financial planning or tax matters, by all means bring in qualified experts to help. But financially independent people generally have their money issues at their fingertips not only for their own use, but for estate purposes as well.

Bottom line: Financial independence involves diligence and a bit of sacrifice, but even the smallest moves can yield big outcomes.

By Nathaniel Sillin

Saving For College: Let Your Student Help!

We all want what’s best for our children, and ultimately, we’d all love to provide them with everything they need to become successful adults. For many, this sentiment often includes the concept of attending and successfully graduating college. While the long-standing idea that a four year university is absolutely essential is now debatable in our society, one thing is not- tuition prices to attend these schools are on a consistent rise each year. In fact, even most trade schools and online educations can put a serious financial strain on your family too. With this in mind, it’s easy to see why parents can have such a hard time fully providing for their children’s education in today’s economic climate.  Often, families try to find answers with student loans and government assistance, but these opportunities typically present themselves during senior year, or even after your child has decided where he/she would like to attend. That is why it is extremely important for parents, and their children, to both begin preparing for this hefty expense as early as possible. Parents can take advantage of a slew of savings opportunities from their banks, jobs, etc., while students can start making a difference inside and outside of the classroom. Here are 3 ways that your son or daughter can immediately begin making a financial impact on their secondary education expenses.

  1. Let them get a job – Look we know that most parents would rather their kids strictly focus on their school work and sports during high school, but with rising tuition costs causing inevitable financial hardships, it may no longer be a reality for most families. On the bright side, your son or daughter does have a lot more to gain from an after school job outside of just money saved; they’ll also learn the value of money earned, develop the ability to juggle a busy schedule, and gain a true sense of responsibility. Plus, it’ll also help them prepare for another scary time in parents’ lives- getting a car and needing constant gas money!
  2. Have them research scholarships early – While many graduating seniors can apply to get grants and scholarships directly from the university they are attending, there are also a lot of other outside financial assistance programs available to students. Your child should immediately begin checking in with their guidance counselors for any local scholarships, either from the town itself or from donors. There are often a slew of opportunities available ranging from social organizations like the Elks and Boy Scouts to scholarships set up in memory of friends and family who have passed. There are even some fraternities and sororities that give away smaller grants to legacies, so start checking with your family!
  3. Make sure they do well in school – This one goes without saying, but often students get foolishly satisfied with simply getting good grades. When you apply to a college, you need to stand out from a sea of students that essentially have all gotten good grades. Your child can do that by joining different social clubs in school, taking part in student government/counsel, and striving towards honors and AP classes. Luckily for them, this will not only help your son or daughter actually get into college, but potentially help them save money on school too! Passing AP exams can count as free college credit, while doing well on your SAT’s can make them eligible for statewide grants such as the Bloustein Scholarship in NJ. Plenty of in-school groups like the Future Business Leaders of America and Bottlecappers also offer their own scholarships to graduating seniors.

Binge on Yourself Instead of on Shopping

pamperIt would great if we all made only rational, well-analyzed spending decisions. But none of us is a robot. We’ve all made emotional buys at one point or another. Think back on purchases you’ve made because you had a rough day at work. Or maybe it was an argument that got you agitated. No matter the cause, buys made on feelings instead of frugality can be rough on your bottom line. Here are a few ways to soothe yourself without draining your funds.

Create “me” time

In a lot of cases overspending happens because it gives you a sense of control over your surroundings. Instead of trying to grab control with money, take control of your time and your surroundings. Whether that means gifting yourself with a nice hot bath or time to work on that tinkering project in the garage, commit to unwinding on your own terms.

Connect with a loved one

Loneliness is another emotion that can turn you into a frenzied consumer. A call to a relative you haven’t spoken to in a while or even a spontaneous get-together with a friend can remind you of the wonderful bonds in your life.


It may sound strange, but in many cases the best way to help yourself is to work at making someone else’s life better.


Scientists believe that for certain people splurge shopping releases the same amount of endorphins in the brain as skydiving. So if you are one of those people who gets a real charge out of filling a shopping cart, consider alternatives like going to the gym, walking or riding a bike to get your endorphin rush.

Enjoy nature

One of the best ways to get away from your problems is to, well…get away from them! Leave your connectivity behind and get back in touch with a favorite out of the way spot.


A little healthy escapism is always good for taking your mind off your day-to-day worries. Whereas passive media like television usually serves more as just a casual distraction, diving into a good book forces you to actively engage in the story.


Be it with children or a pet, having some silly fun can shed a lot of stored up tension you might otherwise look to purge with shopping.


Because coming home to a home crammed full of stuff can add to your stress level, give yourself a present and a future of increased serenity by hunting for items that can be donated or sold online or at a garage sale.


© 2012 BALANCE

Basic Security Tips when Diving Into the Online Pool

Man with splash swimming under dark blue waterNot everyone enjoys technology, but most are forced to embrace it in some way these days. Even if you hate it, it’s here to stay. If you’re a skeptic or just extra cautious, do your best to be informed about online security. Below are a few tips when you’re ready to dip your toe in the online pool.


It’s not news that strong passwords are highly recommended and often mandatory these days. At a minimum, they should be eight characters and include a combination of upper and lower case letters, at least one number, and a special character; or several of them. Avoid using dictionary words or information that is private or easy to guess, such as birthdates of loved ones.

Every online account should have a unique user name and password combination. Yes, it’s tough to keep track of them all, but find a way to remember them or write them on paper and lock them in a cabinet in your home somewhere.

Rotate the use of your passwords. Change them as often as possible, but at least quarterly is the recommended schedule.

When two-factor authentication is offered, take advantage. This means to use more than one way to confirm the user’s identity. Often it means receiving an email or text with a code that needs to be entered before the site will allow access. However, there are other ways this can be done as well.

Computer Protection

Know what operating system is on your computer. It will typically be some version of Microsoft Windows or Apple iOS. However, there are others as well. Keep it updated with the latest fixes and version updates so that it continues to be supported by the vendors.

Even if it isn’t reasonable or possible to update the operating system every time a new one is released, ensure that all critical and security updates are applied as soon as they are made available.

Install some type of anti-malware and antivirus protection on the computer. There are many choices ranging from basic protection against viruses to more thorough solutions that act as personal firewalls. The price ranges are vast as well; from free to hundreds depending on individual needs.


Get into the habit of backing up important files and programs. There are many ways these can be lost, including a hard drive failure or getting infected with ransomware that holds your files hostage until money is paid to a bad guy. Backups can be done easily to an external hard drive. Some are so simple that they just need to be plugged into the computer with a USB connection and the hard drive just grabs the files.

Copying them to some type of cloud service is also an option. Many vendors offer this service and some provide a basic amount of storage space at no charge. The more space needed, the more it costs.

Do these backups regularly, depending on how often your data changes. The more recent the backup, the less re-work needed should the backed up files be necessary to retrieve.

Tools for Safety

There are tools that help keep your information and equipment safe. Some are locks to keep a thief from walking off with the computer and others are software solutions such as Virtual Private Networks (VPN) and solutions for encrypting software. Also, make sure the popup blockers are switched on for each browser used when surfing the Web and consider getting an ad blocking software. This will help to avoid accidental clicking on malicious ads.

Social Media

Most who are skeptical of new technology and particularly online technology may not be as likely to use social media. However, even those who don’t like sites such as Facebook and Instagram, may have a need for using business-related social media. Use caution, regardless of the website, about connecting with those who are strangers. Just as using the sixth sense out in the physical world, it comes in handy here too.


It is nearly impossible to be a consumer without using email. When opening email messages, be extra certain the sender is trustworthy. If there are attachments or links included, don’t open them unless it is absolutely safe. Take extra time to learn how to identify phishing email messages. This is the number one way in which malicious programs are let loose on computers.

There is plenty of information on products and safe browsing habits and it can even be found in books that can be physically held in hand.  So, jump on in to the virtual world. The water’s fine!


© Copyright 2015 Stickley on Security

Required Minimum Distributions (RMDs)

RMDsWhat Are Required Minimum Distributions (RMDs)?

PiggyRequired minimum distributions, often referred  to as RMDs or minimum required distributions,  are amounts that the federal government requires you to withdraw annually from  traditional IRAs and employer-sponsored  retirement plans after you reach age 70½ (or,  in some cases, after you retire). You can always withdraw more than the minimum amount from your IRA or plan in any year, but if you withdraw less than the required minimum, you will be subject to a federal  penalty.

The RMD rules are calculated to spread out  the distribution of your entire interest in an IRA  or plan account over your lifetime. The  purpose of the RMD rules is to ensure that  people don’t just accumulate retirement accounts, defer taxation, and leave these retirement funds as an inheritance. Instead, required minimum distributions generally have the effect of producing taxable income during your lifetime.

Which Retirement Savings Vehicles Are Subject to the RMD Rules?

SEPIn addition to traditional IRAs, simplified employee pension (SEP) IRAs and SIMPLE IRAs are subject to the RMD rules. Roth IRAs, however, are not subject to these rules while you are alive. Although you are not required to take any distributions from your Roth IRAs during your lifetime, your beneficiary will generally be required to take distributions from the Roth IRA after your death.

Employer-sponsored retirement plans that are subject to the RMD rules include qualified pension plans, qualified stock bonus plans, and qualified profit-sharing plans, including 401(k) plans. Section 457(b) plans and Section 403(b) plans are also generally subject to these rules. If you are uncertain whether the RMD rules apply to your employer-sponsored plan, you should consult your plan administrator or a tax professional.

When Must RMDs Be Taken?

GlassesYour first required distribution from an IRA or retirement plan is for the year you reach age 70½. However, you have some flexibility as to when you actually have to take this first-year distribution. You can take it during the year you reach age 70½, or you can delay it until April 1 of the following year.

Since this first distribution generally must be taken no later than April 1 following the year you reach age 70½, this April 1 date is known as your required beginning date. Required distributions for subsequent years must be taken no later than December 31 of each calendar year until you die or your balance is reduced to zero. This means that if you opt to delay your first distribution until April 1 of the following year, you will be required to take two
distributions during that year–your first year’s required distribution and your second year’s required distribution.

Example: You have a traditional IRA. Your 70th birthday is December 2, 2014, so you will reach age 70½ in 2015. You can take your first RMD during 2015, or you can delay it until April 1, 2016. If you choose to delay your first distribution until 2016, you will have to take two required distributions during 2016–one for 2015 and one for 2016. This is because your required distribution for 2015 cannot be
delayed until the following year.

There is one situation in which your required beginning date can be later than described above. If you continue working past age 70½ and are still participating in your employer’s retirement plan, your required beginning date under the plan of your current employer can be as late as April 1 following the calendar year in which you retire (if the retirement plan allows this and you own 5 percent or less of the company). Again, subsequent distributions must be taken no later than December 31 of each calendar year.

Examples: You own more than 5 percent of your employer’s company and you are still working at the company. Your 70th birthday is on December 2, 2014, meaning that you will reach age 70½ in 2015. So you must take your first RMD from your current employer’s plan by April 1, 2016–even if you’re still working for the company at that time.

You participate in two plans–one with your current employer and one with your former employer. You own less than 5 percent of each company. Your 70th birthday is on December 2, 2014 (so you’ll reach 70½ on June 2, 2015), but you’ll keep working until you turn 73 on December 2, 2017. You can delay your first RMD from your current employer’s plan until April 1, 2018–the April 1 following the calendar year in which you retire. However, as to your former employer’s plan, you must take your first distribution (for 2015) no later than April 1, 2016–the April 1 after reaching age 70½.

How Are RMDs Calculated?

CalculatorRMDs are calculated by dividing your traditional IRA or retirement plan account balance by a life expectancy factor specified in IRS tables. Your account balance is usually calculated as of December 31 of the year preceding the calendar year for which the distribution is required to be

Example(s): You have a traditional IRA. Your 70th birthday is November 1 of year one, and you therefore reach age 70½ in year two. Because you turn 70½ in year two, you must take an RMD for year two from your IRA. This distribution (your first RMD) must be taken no later than April 1 of year three. In calculating this RMD, you must use the total value of your IRA as of December 31 of year one.

Caution: When calculating the RMD amount for your second distribution year, you base the calculation on the IRA or plan balance as of December 31 of the first distribution year (the year you reached age 70½) regardless of whether or not you waited until April 1 of the following year to take your first required distribution.

For most taxpayers, calculating RMDs is straightforward. For each calendar year, simply divide your account balance as of December 31 of the prior Calculator year by your distribution period, determined under the Uniform Lifetime Table using your attained age in that calendar year. This life expectancy table is based on the assumption that you have designated a beneficiary who is exactly 10 years younger than you are. Every IRA owner’s and plan participant’s calculation is based on the same assumption.

There is one exception to the procedure described above–the younger spouse rule. If your sole designated beneficiary is your spouse, and he or she is more than 10 years younger than you, the calculation of your RMDs may be based on the longer joint and survivor life expectancy of you and your spouse. (The life expectancy factors can also be found in IRS publication 590.) Consequently, if your spouse is your designated beneficiary and is more than 10 years younger than you, you can take your RMDs over a longer payout period than under the Uniform Lifetime Table. If your beneficiary is not your spouse, or a spouse who is not more than 10 years younger than you, then you must use the shorter payout period specified in the Uniform Lifetime Table.

Uniform Lifetime Table

Tip: In order for the younger spouse rule to apply, your spouse must be sole beneficiary for the entire distribution year. Your spouse will be considered your sole beneficiary for the entire year if he or she is your sole beneficiary on January 1 of the year, and you don’t change your beneficiary during the year. In other words, even if your spouse dies, or you get divorced after January 1, you can use the younger spouse rule for that distribution year (but not for distribution years that follow). In the case of divorce, however, if you designate a new beneficiary prior to the end of the distribution year, you cannot use the younger spouse rule (since your former spouse will not be considered your sole beneficiary for the entire year).

If you have multiple IRAs, an RMD is calculated separately for each IRA. However, you can withdraw the required amount from any one or more IRAs. Inherited IRAs are not included with your own for this purpose. (Similar rules apply to Section 403(b) accounts.) If you participate in more than one employer retirement plan, your RMD is calculated separately for each plan and must be paid from that plan.

 Should You Delay Your First RMD?

chalkboardRemember, you have the option of delaying your first distribution until April 1 following the calendar year in which you reach age 70½ (or April 1 following the calendar year in which you retire, in some cases).

You might delay taking your first distribution if you expect to be in a lower income tax bracket in the following year, perhaps because you’re no longer working or will have less income from other sources. However, if you wait until the following year to take your first distribution, your second distribution must be made on or by December 31 of that same year.

Receiving your first and second RMDs in the same year may not be in your best interest. Since this “double” distribution will increase your taxable income for the year, it will probably cause you to pay more in federal and state income taxes. It could even push you into a higher federal income tax bracket for the year. In addition, the increased income may cause you to lose the benefit of certain tax exemptions and deductions that might otherwise be available to you. So the decision of whether to delay your first required distribution can be important, and should be based on your personal tax situation.

Example(s): You are single and reached age 70½ in 2014. You had taxable income of $25,000 in 2014 and expect to have $25,000 in taxable income in 2015. You have money in a traditional IRA and determined that your RMD from the IRA for 2014 was $50,000, and that your RMD for 2015 is 50,000 as well. You took your first RMD in 2014. The $50,000 was included in your income for 2014, which increased your taxable income to $75,000. At a marginal tax rate of 25 percent, federal income tax was approximately $14,606 for 2014 (assuming no other variables). In 2015, you take your second RMD. The $50,000 will be included in your income for 2015, increasing your taxable income to $75,000 and resulting in federal income tax of approximately $14,843. Total federal income tax for 2014 and 2015 will be $29,449.

 Now suppose you did not take your first RMD in 2014 but waited until 2015. In 2014, your taxable income was $25,000. At a marginal tax rate of 15 percent, your federal income tax was $3,295 for 2014. In 2015, you take both your first RMD ($50,000) and your second RMD ($50,000). These two $50,000 distributions will increase your taxable income in 2015 to $125,000, taxable at a marginal rate of 28 percent, resulting in federal income tax of approximately $28,071. Total federal income tax for 2014 and 2015 will be $31,336–almost $1,887 more than if you had taken your first RMD in 2014.

What If You Fail to Take RMDs As Required?

FailRMDYou can always withdraw more than you are required to from your IRAs and retirement plans. However, if you fail to take at least the RMD for any year (or if you take it too late), you will be subject to a federal penalty. The penalty is a 50 percent excise tax on the amount by which the RMD exceeds the distributions actually made to you during the taxable year.

Example: You own one traditional IRA and compute your RMD for year one to be $7,000. You take only $2,000 as a year-one distribution from the IRA by the date required. Since you are required to take at least $7,000 as a distribution but have only taken $2,000, your RMD exceeds the amount of your actual distribution by $5,000 ($7,000 minus $2,000).You are therefore subject to an excise tax of $2,500 (50 percent of $5,000).

Technical Note: You report and pay the 50 percent tax on your federal income tax return for the calendar year in which the distribution shortfall occurs. You should complete and attach IRS Form 5329, “Additional Taxes on Qualified Plans (Including IRAs) and Other Tax-Favored Accounts.” The tax can be waived if you can demonstrate that your failure to take adequate distributions was due to “reasonable error” and that steps have been taken to correct the insufficient distribution. You must file Form 5329 with your individual income tax return, and attach a letter of explanation. The IRS will review the information you provide and decide whether to grant your request for a waiver.

Can You Satisfy the RMD Rules with the Purchase of an Annuity Contract?

Your purchase of an annuity contract with the funds in your IRA or retirement plan satisfies the RMD rules if all of the following are true:

• Payments are made at least yearly

• The annuity is purchased on or before the date that distributions are required to begin

• The annuity is calculated and paid over a time period that does not exceed those permitted under the RMD rules

• Payments, with certain exceptions, are non-increasing

Tax Considerations

Income tax

TaxLike other distributions from traditional IRAs and retirement plans, RMDs are generally subject to federal (and possibly state) income tax for the year in which you receive the distribution. However, a portion of the funds distributed to you may not be subject to tax if you have ever made after-tax contributions to your IRA or plan.

For example, if some of your traditional IRA contributions were not tax deductible, those contribution amounts will be income tax free when you withdraw them from the IRA. This is simply because those dollars were already taxed once. You should consult a tax professional if your IRA or plan contains any after-tax contributions.

Your distribution may also be income-tax-free if it is a qualified distribution from a Roth 401(k), 403(b), or 457(b) account. Generally, an RMD is qualified if your Roth account satisfies a 5-year holding period requirement. If your RMD is not qualified, then generally only the portion of the RMD paid from your Roth account that represents earnings will be taxable to you–your own contributions to the Roth account are returned tax free.

Because RMDs are paid after you turn age 70½, or after your death, they are not subject to early distribution penalties. Income taxes on RMDs paid to your beneficiary after your death are generally calculated in the same manner as if the payments were made to you.

Caution: Taxable income from an IRA or retirement plan is taxed at ordinary income tax rates even if the funds represent long-term capital gain or qualifying dividends from stock held within the plan. Note that there are special rules for capital gain treatment in some cases on distributions from employer-sponsored retirement plans.

Estate tax

You first need to determine whether or not the federal estate tax will apply to you. If you do not expect the value of your taxable estate to exceed the federal applicable exclusion amount then federal estate tax may not be a concern for you. However, state death (or inheritance) tax may be a concern. In some cases, your assets may be subject to more than one type of death tax–for example, the generation-skipping transfer tax may also apply. Consider getting professional advice to establish appropriate strategies to minimize your future estate tax liability.

For example, you might reduce the value of your taxable estate by gifting all or part of your required distribution to your spouse or others. Making gifts to your spouse can sometimes work well if your taxable estate is larger than your spouse’s, and one or both of you will leave an estate larger than the applicable exclusion amount. This strategy can provide your spouse with additional assets to better utilize his or her applicable exclusion amount, thereby minimizing the combined estate tax liability of you and your spouse. Be sure to consult an estate planning attorney, however, about this and other possible strategies.

Caution: In addition to federal estate tax, your state may impose its own estate or death tax. Consult an estate planning attorney for details.

Inherited IRAs and Retirement Plans

IRAsYour RMDs from your IRA or plan will cease after your death, but your designated beneficiary (or beneficiaries) will then typically be required to take minimum distributions from the account. A spouse beneficiary may generally roll over an inherited IRA or plan account into an IRA in the spouse’s own name, allowing the spouse to delay taking additional required distributions until he or she turns 70½.

As with required lifetime distributions, proper planning for required post-death distributions is essential. You should consult an estate planning attorney and/or a tax professional.


Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, or legal advice. The information presented here is not specific to any individual’s personal circumstances.

To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

These materials are provided for general information and educational purposes based upon publicly available information from sources believed to be reliable—we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

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