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March 2020 – Retirement Solutions Newsletter

Table of Contents:

Due Date Approaches for 2019 Federal Income Tax Returns
Is It Time to Review Your IRA Estate Planning Strategies?
Spring Cleaning Your Way to Better Finances
Is there any way to stop getting unwanted robocalls?
How can I avoid becoming a victim of a social engineering scam?

Due Date Approaches for 2019 Federal Income Tax Returns

Tax filing season is here again. If you haven’t done so already, you’ll want to start pulling things together — that includes getting your hands on a copy of your 2018 tax return and gathering W-2s, 1099s, and deduction records. You’ll need these records whether you’re preparing your own return or paying someone else to prepare your tax return for you.

Don’t procrastinate
The filing deadline for individuals is generally Wednesday, April 15, 2020.

Filing for an extension
If you don’t think you’re going to be able to file your federal income tax return by the due date, you can file for and obtain an extension using IRS Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return. Filing this extension gives you an additional six months (to October 15, 2020) to file your federal income tax return. You can also file for an extension electronically —instructions on how to do so can be found in the Form 4868 instructions.

Filing for an automatic extension does not provide any additional time to pay your tax. When you file for an extension, you have to estimate the amount of tax you will owe and pay this amount by the April filing due date. If you don’t pay the amount you’ve estimated, you may owe interest and penalties. In fact, if the IRS believes that your estimate was not reasonable, it may void your extension.

Note: Special rules apply if you’re living outside the country or serving in the military and on duty outside the United States. In these circumstances, you are generally allowed an automatic two-month extension (to June 15, 2020) without filing Form 4868, though interest will be owed on any taxes due that are paid after the April filing due date. If you served in a combat zone or qualified hazardous duty area, you may be eligible for a longer extension of time to file.

What if you owe?
One of the biggest mistakes you can make is not filing your return because you owe money. If your return shows a balance due, file and pay the amount due in full by the due date if possible. If there’s no way that you can pay what you owe, file the return and pay as much as you can afford. You’ll owe interest and possibly penalties on the unpaid tax, but you’ll limit the penalties assessed by filing your return on time, and you may be able to work with the IRS to pay the remaining balance (options can include paying the unpaid balance in installments).

Expecting a refund?
The IRS is stepping up efforts to combat identity theft and tax refund fraud. New, more aggressive filters that are intended to curtail fraudulent refunds may inadvertently delay some legitimate refund requests. In fact, the IRS is now required to hold refunds on all tax returns claiming the earned income tax credit or the additional child tax credit until at least February 15.
Most filers, though, can expect a refund check to be issued within 21 days of the IRS receiving a tax return.

Is It Time to Review Your IRA Estate Planning Strategies?

The Setting Every Community Up for Retirement Enhancement (SECURE) Act, which was passed in December 2019 as part of a larger federal spending package, included a provision that warrants special attention from those who own high-value IRAs. Specifically, the “stretch” IRA provision — which permitted nonspouse beneficiaries who inherited IRAs to spread distributions over their lifetimes — has been substantially restricted. IRA owners may want to revisit their estate planning strategies to help prevent their heirs from getting hit with higher-than-expected tax bills.

The old “stretch” rules
Under the old rules, a nonspouse beneficiary who inherited IRA assets was required to begin minimum distributions within a certain time frame. Annual distributions could be calculated based on the beneficiary’s life expectancy. This ability to spread out taxable distributions over a lifetime helped minimize the annual tax burden on the beneficiary. In the past, individuals could use this stretch IRA strategy to allow large IRAs to continue benefiting from potential tax-deferred growth for possibly decades.

Example: Consider the hypothetical case of Margaret, a single, 52-year-old banking executive who inherited a million-dollar IRA from her 85-year-old father. Margaret had to begin taking required minimum distributions
(RMDs) from her father’s IRA by December 31 of the year following her father’s death. She was able to base the annual distribution amount on her life expectancy of 32.3 years. Since she didn’t really need the money, she took only the minimum amount required each year, allowing the account to continue growing. Upon Margaret’s death at age 70, the remaining assets passed to her 40-year-old son, who then continued taking distributions over the remaining 13.3 years of Margaret’s life expectancy. The account was able to continue growing for many years.

The new rules
As of January 2020, the rules for inherited IRAs changed dramatically for most nonspouse beneficiaries.1 Now they generally are required to liquidate the account within 10 years of the account owner’s death. This shorter distribution period could result in unanticipated and potentially large tax bills for high-value inherited IRAs.

Example: Under the new rules, Margaret would have to empty the account, in whatever amounts she chooses, within 10 years. Since she stands to earn her highest-ever salaries during that time frame, the distributions could push her into the highest tax bracket at both the federal and state levels. Because the account funds would be depleted after 10 years, they would not eventually pass to her son, and her tax obligations in the decade leading up to her retirement would be much higher than she anticipated.

Notable exceptions
The new rule specifically affects most nonspouse designated beneficiaries who are more than 10 years younger than the original account owner. However, key exceptions apply to those who are known as “eligible designated beneficiaries” — a spouse or minor child of the account owner; those who are not more than 10 years younger than the account owner (such as a close-in-age sibling or other relative); and disabled and chronically ill individuals, as defined by the IRS. The 10-year distribution rule will also apply once a child beneficiary reaches the age of majority and when a successor beneficiary inherits account funds from an initial eligible designated beneficiary.

A word about trusts
In the past, individuals with high-value IRAs have often used what’s known as conduit — or “pass-through” — trusts to manage the distribution of inherited IRA assets. The trusts helped protect the assets from creditors and helped ensure that beneficiaries didn’t spend down their inheritances too quickly. However, conduit trusts are now subject to the same 10-year liquidation requirements, so the new rules may render null and void some of the original reasons the trusts were established.

What can IRA account owners do?
IRA account owners should review their beneficiary designations with their financial or tax professional and consider how the new rules may affect inheritances and taxes. Any strategies that include trusts as beneficiaries should be considered especially carefully. Other strategies account owners may want to consider include converting traditional IRAs to Roths; bringing life insurance, charitable remainder trusts, or accumulation trusts into the mix; and planning for qualified charitable distributions.

1 For account owners who died prior to December 31, 2019, the old rules apply to the initial beneficiary only (i.e., successor beneficiaries will be subject to the 10-year rule).

Spring Cleaning Your Way to Better Finances

Spring is a good time to clean out the cobwebs, and not just in your home or apartment. Your personal finances can benefit from a good spring cleaning, too. Here are some questions to ask yourself regarding your budget, debt, and taxes.

Is there room in my budget to save more?
A budget is the centerpiece of any good personal financial plan. After tallying your monthly income and expenses, you hopefully have money left over to save. But… is there room to save even more? Review your budget again with a fine-tooth comb to see if you might be able to save an additional $25, $50, $100, or$200 per month. Small amounts can add up over time. If you participate in a workplace retirement plan, you might not even notice your slightly smaller paycheck after you increase your contribution amount.

If your expenses are running neck and neck with your income, try to cut back on discretionary spending. If that’s not enough, look for ways to lower your fixed costs or explore ways to increase your current income. Budgeting software and/or smartphone apps can help you analyze your spending patterns and track your savings progress.

Do I have a strategy to reduce debt?
When it comes to your personal finances, reducing debt should always be a priority. Whether you have debt from student loans, credit cards, auto loans, or a mortgage, have a plan to pay down your debt as quickly as possible. Here are some tips.

  • Credit cards. Keep track of your credit card balances and be aware of interest rates and hidden fees; manage your payments so you avoid late fees; pay off high-interest debt first; and avoid charging more than you can pay off at the end of each billing cycle.
  • Student loans. Are you a candidate for income-based repayment? You can learn more at the Federal Student Aid website.
  • Additional payments. Making additional loan payments above and beyond your regular loan payments (or the minimum payment due on credit cards) can reduce the length of your loan and the total interest paid. Online calculators can help you see the impact of making additional payments. For example, if you’re halfway through a 30-year,$250,000 mortgage with a fixed 4.5% interest rate, an additional principal payment of $150 a month can shave two years off your mortgage. An extra $250 a month can shave off three years!
  • Refinancing. If you currently have consumer loans, such as a mortgage or auto loan, take a look at your interest rate. If you’re paying a higher-than-average interest rate, you may want to consider refinancing. Refinancing to a lower interest rate can result in lower monthly payments and potentially less interest paid over the loan’s term. Keep in mind that refinancing often involves its own costs (e.g., points and closing costs for mortgage loans), and you should factor these into your calculation of how much refinancing might save you.
  • Loan consolidation. Loan consolidation involves combining individual loans into one larger loan, allowing you to make only one monthly payment instead of many. Consolidating your loans has several advantages, including saving you time on bill paying and record keeping and making it easier for you to visualize paying down your debt. In addition, you may be able to get a lower interest rate.
  • Paying down debt vs. investing. To decide whether it’s smarter to pay down debt or invest, compare the anticipated rate of return on your investment with the interest rate you pay on your debt. If you would earn less on your investment than you would pay in interest on your debt, then using your extra cash to pay off debt may be the smarter choice. For example, let’s say you have
    $2,000 in an account that earns 1% per year. Meanwhile, you have a credit card balance of$2,000 that incurs annual interest at a rate of 17%. Over the course of a year, your savings account earns $20 interest while your credit card costs you $340 in interest. So paying off your credit card debt first may be the better choice.

Do my taxes need some fine-tuning?
Spring also means the end of the tax filing season. You might ask yourself the following questions:

  • Am I getting a large tax refund or will I owe taxes? In either case, you may want to adjust the amount of federal or state income tax withheld from your paycheck by filing a new Form W-4 with your employer.
  • What else can I learn from my tax return?Now is also a good time to assess tax planning opportunities for the coming year, when you still have many months left to implement any strategy. You can use last year’s tax return as a reference point, then make any anticipated adjustments to your income and deductions for the coming year.

Is there any way to stop getting unwanted robocalls?

Whether it’s a helpful announcement from your child’s school or an appointment reminder from a doctor’s office, getting robocalls has become an everyday occurrence. Unfortunately, robocalls are also used by criminals to collect consumers’ personal and financial information and/or conduct various scams.

The good news is that consumers have won additional protections against unwanted robocalls under the Telephone Robocall Abuse Criminal Enforcement and Deterrence (TRACED) Act. One of the main goals of the law is to make it easier for consumers to avoid unwanted robocalls by:

  • Requiring all carriers to implement caller-ID technology at no additional cost to consumers
  • Making it easier for law enforcement to prosecute illegal robocallers and increasing penalties for robocall violations
  • Creating an interagency task force to study and improve government prosecution of robocall violations

Even when these new protections are implemented, it will take some time to eliminate unwanted robocalls. In the meantime, here are some things you can do to protect yourself:

  • Don’t answer calls when you don’t recognize the phone number.
  • If you pick up an unwanted robocall, hang up right away and avoid answering “yes” or “no” questions, providing personal information, or pressing a number to “opt out.”
  • Consider signing up for a robocall blocking service. Many phone service providers now offer robocall blocking solutions at no additional charge, or you can download additional robocall protection through a third-party app.
  • Register your phone number on the National Do Not Call (DNC) Registry, which removes your number from the call lists used by legitimate telemarketing companies. Keep in mind that registering with the DNC Registry will result in your getting fewer calls from legitimate telemarketers, but it won’t stop illegal robocallers from contacting you.

How can I avoid becoming a victim of a social engineering scam?

Imagine that you receive an email with an urgent message asking you to verify your banking information by clicking on a link. Or perhaps you get an enticing text message claiming that you’ve won a free vacation to the destination of your choice — all you have to do is click on a link you were sent. In both scenarios, clicking on the link can accidentally result in revealing your sensitive personal and financial information to a cybercriminal.

In a social engineering scam, a cybercriminal psychologically manipulates victims into divulging sensitive information. Cybercriminals “engineer” believable scenarios designed to evoke an emotional response (curiosity, fear, empathy, or excitement) from their victims. As a result, people often react without thinking first due to curiosity or concern about the message that was sent. Since social engineering scams appear in many forms and appeal to a variety of emotions, they can be especially difficult to identify.

Fortunately, there are steps you can take to protect yourself from a social engineering scam:

  • If you receive a message conveying a sense of urgency, slow down and read it carefully before reacting. Don’t click on suspicious or unfamiliar links in emails, text messages, and instant messaging services.
  • Never download email attachments unless you can verify that the sender is legitimate. Similarly, don’t send money to an email that requests charitable help unless you can follow up directly with the organization.
  • Be wary of unsolicited messages. If you get an email or a text that asks you for financial information or passwords, do not reply, delete it.
  • Remember that social engineering scams can also be used over the phone. Use healthy skepticism when you receive phone calls that demand money or request sensitive personal and financial information.