Should I Set Up a Traditional 401k for My Business?

Should I Set Up a Traditional 401k for My Business?

 

Whether you recently transitioned to being self-employed or have been a business owner for years, you may have wondered what the best way is to save for retirement. While it is commonplace for established companies to offer a retirement plan to their employees, many self-employed individuals may not realize the potential for significant retirement savings by establishing their own plan.

However, the decision as to which type of plan to choose is far from simple. There are a multitude of questions a business owner must ask themselves before they can identify the best fit for their goals and preferences. To assist in this decision, the following flowchart poses the most pertinent of these questions.

 

 

Whether you are considering a SIMPLE IRA or are curious how a defined benefit plan can help you achieve your savings goals, Merriman’s team of knowledgeable advisors are here to help you make the most optimal selection. Please don’t hesitate to contact us if you have questions about your unique situation.

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

How to Report Your 2020 RMD Rollover on Your Tax Return

How to Report Your 2020 RMD Rollover on Your Tax Return

 

Following the stock market decline early in 2020, Congress passed the CARES Act on March 27, providing relief for individuals and businesses impacted by the pandemic. One of the provisions was a suspension of 2020 Required Minimum Distributions (RMDs). Individuals who hadn’t taken a distribution yet were no longer required to do so.

For individuals who took a distribution early in 2020, they were given the opportunity to “undo” part or all of that distribution by returning funds to their IRA by August 31, 2020.

 

Tax Forms for IRA Rollovers

Some taxpayers who took advantage of this rollover to undo that RMD may be surprised to get tax forms reporting the withdrawal.

Example 1: Kendra turned 75 in 2020 and had a $30,000 RMD at the start of the year. She took her distribution on February 1, 2020, with 10% tax withholding ($27,000 net distribution and $3,000 for taxes). She didn’t “need” the distribution as Social Security and other income covered her entire cost of living. Because she didn’t need the money, she returned the full $30,000 to her IRA on June 15, 2020.

In January 2021, Kendra was surprised to receive a Form 1099-R since she returned the entire amount and knew she shouldn’t owe taxes on it. The Form 1099-R reported a $30,000 distribution from her IRA in Box 1 and $3,000 in Box 4 for tax withholding. Box 7 reports code 7 for a “normal distribution.”

 

How to Report the 2020 Rollover

Since Kendra returned the entire $30,000 withdrawal listed on her tax return, it won’t be included in her taxable income. However, she will need to report both the withdrawal and the rollover on her tax return.

In her case, the full $30,000 will be reported on line 4a of Form 1040, with $0 reported on Line 4b. She will also write “Rollover” next to line 4b. In her case, the $3,000 that was withheld for taxes will still be reported with other tax withholding and will impact her ultimate refund or balance due.

How to Report a Partial Rollover

Example 2: Jane turned 76 in 2020. She also had a $30,000 distribution that she took on February 1, 2020, with 10% tax withholding ($27,000 net after $3,000 for taxes). On June 15, 2020, she returned $12,000 to her IRA instead of the full $30,000.

In January 2021, she received a 1099-R that also reported a $30,000 distribution from her IRA in Box 1 and $3,000 in Box 4 for tax withholding. Box 7 reports Code 7 for a “normal distribution.”

In Jane’s case, she will also report the full $30,000 on line 4a. She will report $18,000 on line 4b ($30,000 original distribution minus $12,000 returned to her IRA in 2020). She will also write “Rollover” next to line 4b. The $3,000 withheld for taxes will still be reported with other tax withholding as usual.

 

Form 5498

Taxpayers who returned some or all of their distribution in 2020 will receive Form 5498. They likely will not receive this form until May 2021—after the April 15 tax filing deadline. This form will be used to report the amount returned to the retirement account in 2020 and verify the rollover reported on the 2020 tax return. The taxpayer does not need to wait (and should not wait) for the Form 5498 before filing their taxes. This is simply an information form so the IRS can verify what was reported on the tax return.

 

Exception from the Usual Rule

It’s important to remember that all of these rollovers are a one-time exception in 2020 from the usual rule. Typically, this type of rollover can only be done once per rolling 365-day period and must be completed within 60 days of taking the withdrawal. Also, RMDs are generally specifically prohibited from this type of rollover.

 

Conclusion

Individuals who returned RMDs in 2020 to avoid having to include the withdrawal in their taxable income will still receive a tax form showing the distribution and will have to report it on their tax return. When reported correctly, the amount returned will be excluded from their income as intended.

 

 

 

 

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

Start the New Year Right – Financial Mistakes to Avoid in 2021

Start the New Year Right – Financial Mistakes to Avoid in 2021

 

In a recent National Association for Business Economics survey, 72% of respondents expect a recession to hit our country by the end of 2021. The last major recession, from December 2007 to June 2009, brought with it a huge dive in the stock market.

While no one knows when the next recession will occur, you need to learn what not to do so that you can make yourself financially stable. With that in mind, Business Insider reached out to experts to analyze the mistakes which hurt you and to offer ideas for avoiding them. Here are some of the top mistakes along with some additional tips to make sure you’re prepared for anything!

 

Avoid excessive spending

People think that they earn in order to spend. But in reality, money has four jobs: spending, saving, investing, and donating.

Spending is one factor of money management. Most people make mistakes by spending excessively. They spend more and thus get into serious debt.

When you pick up that extra cheese pizza, stop for a latte, eat out, or pay for a movie, your spending seems small. However, it adds up to a larger amount once you consider how much you spend on these small items in a year.

If you’re enduring financial hardship, you need to monitor your expenses closely.

 

Not having a detailed idea of all expenses

Having only a rough idea of where your money goes can land you in a difficult situation. As the saying goes, you can’t manage what you don’t measure. When asked how much you will spend this month, a quick answer would no doubt include a few bills and other expenses. But when you start going through your bank and credit card bills, you will be surprised to see where a substantial amount of your paycheck is going. So, in order to avoid these errors, it is mandatory that you detail all these individual expenses, and there are many good tools to help with budgeting.

 

Living on borrowed money

Excessively borrowing or spending on credit is not financially healthy. Using a credit card for day-to-day purchases or for the airline miles or rewards programs is normal. But if you’re paying interest on gas, groceries, and other items, then you’re making a big mistake. Credit card interest rates make the price of the items a bit expensive. Purchasing on credit also has the tendency to allow you to lose track of exactly what you are spending, often resulting in spending more than you earn.

If you use credit cards to make purchases, make sure to repay the entire bill at the end of every billing cycle.

 

Making minimum payments on credit card debt

Paying extra on credit card debt is certainly better than paying the minimum amount. You can repay your debt faster by putting extra money toward the debt with the

highest interest rate and making just the minimum payments on the rest. As one balance is paid off, shift those payments toward the next card with the highest rate and so on until you’re debt-free.

 

Paying bills late

Paying bills late means extra money goes out of the pocket. Many people forget the due dates of bill payments. To avoid this, automatic bill payment is a great solution. In addition, you can use your phone’s calendar alert and easy-to-use apps to send you text alerts when bills are due.

 

Halting on regular savings and investing

The stock market was volatile in 2020. Many investors panicked as their investment portfolio temporarily went off track due to a sudden fall in the stock prices. The only way to deal with this is to reset your investment portfolio.

Watching the market drop doesn’t mean you should stop investing—in fact, you get the benefit from stocks being cheaper than they previously were.

Make a financial plan, choose an investment strategy that’s appropriate for your needs, and stick to the plan unless there’s a major change in your financial life.

 

Stopping retirement contributions

If you or your spouse lose your job when unexpected expenses arise, you might consider stopping your contributions to your retirement savings to cope with increased financial demand. However, once the situation comes under control, do not neglect your retirement fund.

 

Spending more to maintain a lifestyle

A sudden rise in your income can entice you to improve your lifestyle. Resisting this temptation is the smartest thing you can do, particularly if you have a large goal like buying a house, good education for the kids, etc.

You can splurge a bit but don’t spend beyond your budget. Rather, focus on saving the amount you need to attain a financial goal.

 

Using home equity like a piggy bank

Having a shelter over your head is the most essential thing. Your home is your palace. Taking out a loan from it gives the authority over your house to someone else. So, if you can’t repay the amount, you can lose your home. Think twice before doing so.

 

Spending too much on the house

Dreaming of a big house is good, but it is not a necessity. If you have a big family, you may need a larger house, but to go for a luxury home is something that hampers your spending. Choosing a more expensive or luxury home will only mean more taxes, maintenance, and utilities. After knowing this, do you still want to take a chance for a long-term dent in your budget?

 

Having the wrong life insurance policy

Life insurance is important if you have dependents. A general rule of thumb is to have term insurance equal to ten times your salary. Work with an insurance agent you trust, one who’s not going to try and sell you a more expensive policy than you need.

Gather knowledge and purchase a policy that fulfills the needed requirement.

 

Not having an emergency fund

You should set aside extra funds for emergencies. They can happen to anyone at any time. Unforeseen circumstances like a job loss, car repair bill, illness, etc., should be planned for as much as possible. An emergency fund can protect you from crippling debts. A good rule of thumb is to have at least 3 to 6 months of your spending set aside in an emergency fund.

Avoiding the mistakes and following the strategies shared above can help you have a healthier financial life in 2021.

 

 

Written by: Phil Bradford | Exclusively for Merriman.com

 Author Bio: Phil Bradford is a financial content writer and an enthusiast. He is not employed or associated with Merriman. He has expert knowledge about personal finance issues and he is a regular contributor to Debt Consolidation Care. His passion for helping people who are stuck in financial problems has earned him recognition and honor in the industry. Besides writing, he loves to travel and read books.

Disclosure: The material is presented solely for information purposes and has been gathered from sources believed to be reliable, however Merriman cannot guarantee the accuracy or completeness of such information, and certain information presented here may have been condensed or summarized from its original source. Merriman does not provide tax, legal or accounting advice, and nothing contained in these materials should be relied upon as such.

 

Think Twice Before Moving Into Your Rental To Avoid Taxes

Think Twice Before Moving Into Your Rental To Avoid Taxes

Updated 12/23/2020 by Geoff Curran, Jeff Barnett, & Scott Christensen

National real estate prices have been on the rise since 2014, and many investors who jumped into the rental industry since the Great Recession have substantial gains in property values (S&P Dow Jones Indices, 2019). You might be considering selling your rental to lock in profits and enjoy the fruits of your well-timed investment, but realizing those gains could come at a cost. You could owe capital gains tax in addition to potential depreciation recapture on the profits from your rental sale.

One strategy for paying less tax is to move back into your rental and use the property as a primary residence before selling. Living in your rental full-time for at least two years prior to selling can help you take advantage of the gain exclusion of $500,000 ($250,000 if single), which can wipe out all or most of your gain on the property. Sounds easy, right?

Let’s take a look at some of the moving pieces for determining the taxes when you sell your rental. Factors like depreciation recapture, qualified vs. non-qualified use and adjusted cost basis could make you think twice before moving back into your rental to avoid taxes.

Depreciation Recapture

One of the benefits of having a rental is the ability to claim depreciation on the property, which allows you to offset rental income that would otherwise be taxed as ordinary income. The depreciation you take reduces your basis in the property, potentially resulting in more capital gains when you ultimately sell. If you sell the property for a gain, the amount up to the depreciation you took is taxed at the maximum recapture rate of 25%. Any remaining gains are taxed at the lower long-term capital gains rate. Moving back into your rental to claim the primary residence gain exclusion does not allow you to exclude your depreciation recapture, so you might still owe a hefty tax bill after moving back, depending on how much depreciation was deducted. (IRS, 2019).

When the Property Sells for a Loss

Keep in mind that if you sell your home for a loss, whether it’s currently a rental or is now your primary residence, you aren’t subject to depreciation recapture or other gains taxes. However, due to depreciation decreasing your cost basis in the property each year until it reaches zero, it’s more common that sales of former rental homes result in gains. (more…)

1 In 5 Americans Are Delaying Retirement, and Here’s Why

1 In 5 Americans Are Delaying Retirement, and Here’s Why

 

The devastating effects of COVID-19 are still making themselves known, as cities all over the world face longer lockdowns and restrictions in a bid to stop the spread of the virus. Life has certainly changed, with working from home now the new normal and public transport dwindling to a few people on each bus or train.

You may find that your life has been uprooted severely, and adjustments have had to be made in order to cope. With unemployment at an all-time high, there is a global concern for all of our futures. Many older workers were also looking to retire this year, but with the uncertainty surrounding when exactly life will return back to something resembling normal, seniors have been putting their plans on hold—and it might be time you followed suit.

Assessing retirement options

Currently, one in five American workers of retiree age have put their twilight-year plans on hold specifically due to COVID-19. With so many families’ finances taking a turn for the worse during this incredibly difficult time, delaying retirement could be a very smart idea.

The benefits of delaying retirement

Older workers may find employment more difficult to navigate due to the high level of young workers also vying for a small number of positions. With 13 applications for every 1 job available, recruiters and employers may find that the younger generation have more qualifications and are physically more fit than their senior counterparts. Older workers are often looked over despite their decades of experience; also, knowing retirement is on its way, it’s more cost effective for the business to hire someone who is guaranteed to be there for the long term.

Delaying retirement eliminates this issue. The employer you already work for and have been employed with for some time has been happy with your work; perhaps you’ve been in the same role for 15+ years. It’s a lot smarter to stay there and put your retirement on hold for now. Remember—it won’t be forever. Think of it more like a “putting in the last extra mile” situation.

Putting the brakes on your retirement plans for now also gives you further opportunity to add more funds into your superannuation account. Some super funds even have a clause that means you’ll receive more money by delaying withdrawing for a few years, with potentially up to 24% more benefits coming your way.

The differences between what a 65-year-old may receive once retiring in comparison to what a 70-year-old could receive may be as high as an 8% difference in funds per year. It’s a good idea to have a look at your super fund at this time, just in case you weren’t aware of such retirement clauses.

The cons of delaying retirement

By making the decision to delay retirement, there are a few cons to be on the lookout for. Firstly, your physical health is very important, and any issues that arise in the future could find you out of a job. Even if you look after yourself well, accidents and falls are statistically at a much higher level amongst older people. Regardless, many may find that they also need to leave work earlier to care for a partner or family member who has become too unwell to continue working.

It also might be tempting to get yourself further into debt throughout the pandemic as well. Taking out credit cards and personal loans might help in the short term to help you get back on your feet, but paying these off in the long term can result in even further debt. It’s important to have Plan Bs for all scenarios, just in case those retirement plans don’t pan out the way you expected them to.

Holding out on retirement a little longer

There is absolutely nothing wrong with planning for your retirement at this stage, but as 2020 has proven to all of us, it’s a good idea to ensure you stay flexible or have adaptable plans that can easily be changed. The future is so unexpected that it’s hard to stay one step ahead, but being as organized as you can will assist with navigating these uncertain times.

However, it’s also important to note that delaying retirement at this time might just not be possible, and you’ll need to look at every angle to see what an unexpected retirement might look like for you and your family.

 

Written Exclusively for Merriman.com by Madison Smith

Madison Smith is a personal and home finance expert at BestCompany.com. She works to help others make positive financial strides in their lives by providing expert insight on anything from credit card debt to home-buying tips.

 

 

What is The Best Strategy for My Investments During These Unpredictable Times?

What is The Best Strategy for My Investments During These Unpredictable Times?

 

In the weeks following news of the corona virus outbreak, the S&P 500 lost over one third (34%) of its value (between February 19th and March 23rd).

Unemployment figures so far have fallen to 6.7% for the month of November, down from 11.1%  in June, yet the S&P 500 has rallied 61.87% from the March 23rd low (through November 30th).

Markets and the economy seem to have decoupled—should we be worried? Have we seen this before? Let’s look at past major market declines to see how markets and economic measures have acted in the past.

In the 1973–74 market crash, the S&P 500 bottomed on October 3rd, 1974, and started to rally forward while unemployment continued to increase until May 1st, 1975, seven months later.

In the aftermath of the tech bubble bursting in the early 2000s, the S&P 500 bottomed on October 9th, 2002, after dropping 49%; and it began a swift rise while unemployment rates also continued to increase for nine months until June 2003.

In the aftermath of the financial crisis just over a decade ago, the S&P 500 bottomed on March 9th, 2009, after losing over 56% of its value. The markets began a lasting bull market while the news and data grew worse. Unemployment continued to increase through October 2009 (eight months later), GDP continued to decline through June 2009, and bankruptcies of banks continued at record rate throughout 2009 and into 2010. Again, the stock market seemed to have “decoupled” from economic data.

The stock market is considered a “leading economic indicator.” The news and measurements of the economy determine what has happened while the market looks forward to what may be coming.

There is precedence for what is happening with markets rebounding before we see the elusive “light at the end of the tunnel.” History shows that markets have typically rebounded ahead of economic measurements.

So, what is next?

The events that have unfolded in 2020 emphasize how unpredictable the future is and will continue to be. While many knew that the possibility of a global pandemic existed, we had no idea when it would strike, causing the 34% drop in February and March while fear took control of the markets. Further, economic measurements did not signal when markets would begin a recovery. Once again, there was no “light at the end of the tunnel” to signal the 62% market surge from March 23rd through November 30th.

We may not yet be through the worst of this pandemic. Markets may drop again, possibly even further than they did in March. Perhaps the roll out of the vaccine will change things more quickly than previously expected. Maybe the market will continue to grow from here.

The future is fundamentally unpredictable, and the world is always changing; yet the very real effects of fear and greed that each of these cycles elicits is predictable and consistent. We know that fear and greed create chemical reactions in our brains that lead to poor decision making. We need a disciplined framework to lean on to keep from making decisions we later regret.

The best strategy for capturing the highest risk-adjusted returns remains keeping your money invested in a massively diversified portfolio, rebalancing when your allocation deviates from its target. This will have you take advantage of market swings.

At Merriman, our rebalancing sensitivities were triggered in March and April for many portfolios. This generally had us buying stock funds after the big decline with proceeds we pulled from bond funds after they had rallied in response to the fear of current events. Going further back, rebalancing had us trimming from stock funds throughout the more than decade-long bull market that started with the recovery from the financial crisis of 2008 to add to our bond funds, preventing greed from taking those profits back.

Rebalancing has us buying asset classes at low prices when fear can make it difficult, then selling asset classes after they have grown to higher prices when greed can have us wanting more.

Rebalancing is a disciplined framework that helps us with the number one goal of investing: Buy Low, Sell High.

Feel free to reach out to us if you’d like to discuss how to apply rebalancing to your specific situation!

 

Important Disclosure:
Past performance is not indicative of future results. No investor should assume that future performance of the S&P 500 will be similar or equal to previous years/periods.   The S&P 500 is a market capitalization-weighted index of 500 widely held stocks often used as a proxy for the U.S stock market.  S&P 500 performance data was obtained from Yahoo Finance.