Articles for February 2016

Should You File Jointly, Or Not?

For many married couples, filing jointly is a good idea, but there are exceptions.

Ninety-five percent of married couples file joint federal tax returns. Filing jointly can be convenient. Frequently, there’s a financial advantage, but that does not mean it should be done without consideration.1

Years ago, there was less incentive to file jointly. That was because the “marriage penalty” for doing so was effectively greater. There is no written “marriage penalty” in the Internal Revenue Code, but, in the past, income tax brackets were structured a bit differently and spouses having similar annual incomes sometimes paid more taxes by filing jointly than single taxpayers did.

There are many good reasons to file jointly. Nearly all of them involve saving money.

Joint filing may give you an effective tax break right off the bat. Currently, married taxpayers who file separately face the 28%, 33%, 35%, and 39.6% income tax brackets at lower income thresholds than other unmarried taxpayers.2

Joint filers can claim significant tax credits that marrieds filing separately cannot. If you want to claim the American Opportunity Tax Credit, the Lifetime Learning Credit, the Elderly or Disabled Credit, or the Earned Income Tax Credit (EITC), you have to file jointly. Joint filing also gives you the potential to claim the full Child Tax Credit, rather than a reduced one.3

Deductions, too, decrease when you file separately as a married couple. Standard deductions fall significantly. Phase-out ranges affect itemized deductions, and some itemized deductions are unavailable for married couples who do not file jointly. Couples who file separate 1040s can only deduct 50% of the capital gains losses joint filers can. In addition, if one spouse elects to itemize deductions, so must the other (there must be a separate Schedule A for each spouse). The spouse with fewer deductions has no ability to use the standard deduction to lower his or her taxable income.2,3

Joint filing even helps you with regard to the Alternative Minimum Tax. When you file separately as a married couple, your AMT exemption falls by 50%. So you may be more susceptible to the AMT if you file separately. If the AMT affects you, you will find many federal tax deductions reduced or unavailable to you.3

Do you live in a community property state? If you do, you may know that state tax law defines what is considered separately held or jointly held property. If you want to itemize deductions in a community property state, the paperwork can be onerous.3

More of your Social Security benefits may be taxed if you file separately. Social Security gives you a “base exemption,” an income threshold above which Social Security benefits may be taxable. The base exemption for married couples filing jointly is $32,000, meaning that if 50% of the Social Security benefits you receive in a tax year plus your other income in a tax year exceeds $32,000, taxes may apply. The base exemption for married couples filing separately who live together at any time during the tax year is $0. It improves to $25,000 for married couples filing separately who live apart for an entire year.4

So why would you not file jointly when married? In certain circumstances, filing separately may be wiser.

Maybe you do not trust your spouse financially. If your spouse is a tax cheat or interprets federal tax law very loosely, filing jointly could prove hazardous in the case of an audit or other troubles. Both spouses must sign a joint return, meaning that both spouses are legally responsible for all taxes, penalties, and fines linked to that return. Yes, an innocent spouse may be offered tax protection by the IRS, but that innocence must be proven.2,3

Maybe you or your spouse have large out-of-pocket medical expenses. If so, and if the spouse contending with such bills earns much less than the other, there may be merit in filing separately. By doing so, the spouse with far less income might have an opportunity to meet the 10% AGI threshold needed to itemize medical expenses. (The 7.5% AGI threshold for itemizing these costs is still in place for taxpayers age 65 and older.)2

Maybe you are separating or divorcing. If that is the case, then it may seem only natural to begin filing separately while still married. Doing so now may lessen the chance of the two of you wading through tax issues in the aftermath of a split.

If you are unsure about whether to file jointly or singly, you can ask a tax professional for his or her opinion. Or, that professional can look at last year’s return and run the numbers for you. Most couples find that filing jointly works out best, but there are exceptions.

Mike Moffitt may be reached at phone# 641-464-2248 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – forbes.com/sites/robertwood/2016/01/26/married-filing-joint-tax-returns-irs-helps-some-couples-with-offshore-accounts/ [2/6/16]
2 – abcnews.go.com/Business/filing-taxes-jointly-good-idea/story?id=22504248 [2/17/14]
3 – foxbusiness.com/features/2015/03/06/should-couples-file-taxes-separately-or-jointly-which-is-best-for.html [3/6/15]
4 – irs.com/articles/how-are-social-security-benefits-taxed [2/11/16]

The Pros & Cons of Roth IRA Conversions

What are the potential benefits? What are the draw backs?

If you own a traditional IRA, perhaps you have thought about converting it to a Roth IRA. Going Roth makes sense for some traditional IRA owners, but not all.

Why go Roth? There is an assumption behind every Roth IRA conversion – a belief that income tax rates will be higher in future years than they are today. If you think that will happen, then you may be compelled to go Roth. After all, once you are age 59½ and have owned a Roth IRA for five years (i.e., once five full years have passed since the conversion), withdrawals from the IRA are tax-free.1

Additionally, you never have to make mandatory withdrawals from a Roth IRA, and you can contribute to a Roth IRA as long as you live, unless you lack earned income or make too much money to do so.2,3

For 2016, the contribution limits are $132,000 for single filers and $194,000 for joint filers and qualifying widow(er)s, with phase-outs respectively kicking in at $117,000 and $184,000. (These numbers represent modified adjusted gross income.)4

While you may make too much to contribute to a Roth IRA, anyone may convert a traditional IRA to a Roth. Imagine never having to draw down your IRA each year. Imagine having a reservoir of tax-free income for retirement (provided you follow IRS rules). Imagine the possibility of those assets passing tax-free to your heirs. Sounds great, right? It certainly does – but the question is, can you handle the taxes that would result from a Roth conversion?

Why not go Roth? Two reasons: the tax hit could be substantial, and time may not be on your side.

A Roth IRA conversion is a taxable event. When you convert a traditional IRA (which is funded with pre-tax dollars) into a Roth IRA (which is funded with after-tax dollars), all the pretax contributions and earnings for the former traditional IRA become taxable. When you add the taxable income from the conversion into your total for a given year, you could find yourself in a higher tax bracket.2

If you are nearing retirement age, going Roth may not be worth it. If you convert a sizable traditional IRA to a Roth when you are in your fifties or sixties, it could take a decade (or longer) for the IRA to recapture the dollars lost to taxes on the conversion. Model scenarios considering “what ifs” should be mapped out.

In many respects, the earlier in life you convert a regular IRA to a Roth, the better. Your income should rise as you get older; you will likely finish your career in a higher tax bracket than you were in when you were first employed. Those conditions relate to a key argument for going Roth: it is better to pay taxes on IRA contributions today than on IRA withdrawals tomorrow.

However, since many retirees have lower income levels than their end salaries, they may retire to a lower tax rate. That is a key argument against Roth conversion.

If you aren’t sure which argument to believe, it may be reassuring to know that you can go Roth without converting your whole IRA.

You could do a partial conversion. Is your traditional IRA sizable? You could make multiple partial Roth conversions through the years. This could be a good idea if you are in one of the lower tax brackets and like to itemize deductions.2

You could even undo the conversion. It is possible to “recharacterize” (that is, reverse) Roth IRA conversions. If a newly minted Roth IRA loses value due to poor market performance, you may want to do it. The IRS gives you until October 15 of the year following the initial conversion to “reconvert’’ the Roth back into a traditional IRA and avoid the related tax liability.5

You could “have it both ways”. As no one can fully predict the future of American taxation, some people contribute to both Roth and traditional IRAs – figuring that they can be at least “half right” regardless of whether taxes increase or decrease.

If you do go Roth, your heirs might receive a tax-free inheritance. Lastly, Roth IRAs can prove to be very useful estate planning tools. (You may have heard of the “stretch IRA” strategy, which can theoretically keep IRA assets growing for generations.) If the rules are followed, Roth IRA heirs can end up with a tax-free inheritance, paid out either annually or as a lump sum. In contrast, distributions of inherited assets from a traditional IRA are routinely taxed.2

Mike Moffitt may be reached at ph# 641-782-5577 or email mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.
Distributions made prior to age 59 1/2 may be subject to a federal income tax penalty. If converting a
traditional IRA to a Roth IRA, you will owe ordinary income taxes on any previously deducted traditional
IRA contributions and on all earnings.

Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.

“Stretch IRA” is a marketing term implying the ability of a beneficiary of a Decedent’s IRA to withdraw the least amount of money at the latest allowable time in order to maintain the inherited IRA assets for the longest time period possible. Beneficiary distribution options depend on a number of factors such as the type and age of the beneficiary, the relationship of the beneficiary to the decedent and the age of the decedent at death and may result in the inability to “stretch” a decedent’s IRA. Illustration values will greatly depend on the assumptions used which may not be predictable such as future tax laws, IRS rules, inflation and constant rates of return. Costs including custodial fees may be incurred on a specified frequency while the account remains open.

This material was prepared by MarketingLibrary.Net Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. Marketing Library.Net Inc. is not affiliated with any broker or brokerage firm that may be providing this information to you. All information is believed to be from reliable sources; however we make no representation as to its completeness or accuracy. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is not a solicitation or a recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – bankrate.com/finance/retirement/roth-ira-conversion-subject-to-5-year-rule.aspx [10/30/14]
2 – kiplinger.com/article/investing/T046-C000-S002-reap-the-rewards-of-a-roth-ira.html [12/15]
3 – irs.gov/Retirement-Plans/Roth-IRAs [10/23/15]
4 – irs.gov/Retirement-Plans/Plan-Participant,-Employee/Amount-of-Roth-IRA-Contributions-That-You-Can-Make-for-2016 [10/23/15]
5 – thestreet.com/story/13321349/1/roth-recharacterization-how-to-maneuver-your-ira-before-oct-15.html [10/13/15]

The Chapters of Retirement

The five phases of life after 50 & the considerations that accompany them.

The journey to and through retirement occurs gradually, like successive chapters in a book. Each chapter has its own things to consider.

Chapter 1 (the fifties). At this stage of life, retirement becomes less like a far-off dream and more like a forthcoming reality. You begin to think about when you can retire, and about taking the right steps to retire comfortably.

By one measure, men have their peak earning years in their mid-fifties. Data from the Federal Reserve Bank of New York shows the median male worker earning 127% of his initial salary at that time. The peak earning years for women are harder to statistically gauge, as some women leave the paid workforce for years-long intervals. In inflation-adjusted terms, earnings actually peak earlier in life. PayScale estimates that on average, pay growth for women flattens at age 39 (at a median salary of $60,000), and at age 48 for men (at a median salary of $95,000). So by the fifties, many people are receiving raises to keep up with the cost of living, but essentially earning the equivalent of what they made a decade or more ago.1,2

During your fifties, you may contend with “lifestyle creep” – the phenomenon of your household expenses growing along with your pay raises. These increased expenses may include housing costs, education costs, healthcare costs, even eldercare costs. Despite these financial strains, the inflow of new money into retirement accounts must not cease; your retirement plan assets should not be drawn down through loans or withdrawn too early.

Chapter 2 (the early sixties). The anticipation builds at this point; you start to think about the process of retiring and the precise financial and lifestyle steps involved. You also begin to think about the near future – not only what you will do next, but how you will do it.

According to the Center for Retirement Research at Boston College, the average American man now retires at age 64, the average American woman at age 62. So the reality is that the early sixties coincide with retirement for many people. This reality is worth noting in light of the difference between Americans’ envisioned and actual retirement ages. Last April, a Gallup poll asked pre-retirees when they expected to leave the workforce: 37% saw themselves working past 65, 32% before 65, and 24% at 65. The same poll asked older, retired Americans when they had stopped working full-time, and 67% of those respondents said they had done so before 65.3,4

You may have to act on your plans to volunteer or start an encore career earlier than you think. If you do not have a set plan for the next chapter, a phased retirement may give you more of an opportunity to determine one.

This is also a time to dial down risk in your portfolio, especially if a bear market occurs right before you retire. You have little time to recover from a downturn.

Chapter 3 (the start of retired life). The first year or so of retirement is akin to a “honeymoon phase” – you have the time and perhaps the money to pursue all kinds of dreams. The key is not to spend wildly. Lifestyle creep also affects new retirees; free time often means more chances to spend money.

The good news is that you may spend less than you think. Transportation, insurance, housing, clothing and food costs may all decline. The common view is that you will need to live on 80% of your end salary for a comfortable retirement, but in a 2014 T. Rowe Price survey of retirees, the average respondent was living on 66% of his or her pre-retirement income. Eighty-five percent of those retirees said they were maintaining their standard of living with less money.5

Chapter 4 (the mid-sixties through the late seventies). This is when some people get a little restless. It is also when some people find their retirement savings growing disturbingly smaller. You may get bored with all-leisure, all-the-time and want to volunteer or work on your own terms, health permitting. You may want to adjust your retirement income strategy or see if new streams of income can be arranged.

Chapter 5 (eighty & afterward). The last chapter of retirement is one frequently characterized by the sharing of legacies and life lessons, a new perspective on the process of living and aging, and deeper engagement (or reengagement) with children and grandchildren. This is also the time when you should think about your financial legacy, and review or update your estate plan so that when you leave this world, things are in good order and your wishes are followed.

Before and during your retirement, it is wise to keep in touch with a financial professional who can guide and consult you when questions about income, investments, wealth protection, and wealth transfer arise.

Mike Moffitt may be reached at ph# 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – marketwatch.com/story/peak-earnings-for-men-come-in-their-early-50s-2015-06-18 [6/18/15]
2 – fastcompany.com/3025564/how-to-be-a-success-at-everything/when-are-your-high-earning-years-how-much-you-should-make- [1/30/14]
3 – crr.bc.edu/briefs/the-average-retirement-age-an-update/ [3/15]
4 – gallup.com/poll/182939/americans-settling-older-retirement-age.aspx [4/29/15]
5 – news.investors.com/investing/073014-711065-people-adjust-to-lower-income-in-retirement.htm [7/30/14]

White House Proposes Changes to Retirement Plans

A look at some of the ideas contained in the 2017 federal budget
Provided by Michael Moffitt

Will workplace retirement plans be altered in the near future? The White House will propose some changes to these plans in the 2017 federal budget, with the goal of making such programs more accessible. Here are some of the envisioned changes.

Pooled employer-sponsored retirement programs. This concept could save small businesses money. Current laws permit multi-employer retirement plans, but the companies involved must be similar in nature. The White House wants to lift that restriction.1,2

In theory, allowing businesses across disparate industries to join pooled retirement plans could result in significant savings. Administrative expenses could be reduced, as well as the costs of compliance.

Would governmental and non-profit workplaces also be allowed to pool their retirement plans under the proposal? There is no word about that at this point.

This pooled retirement plan concept would offer employees new degrees of portability for their savings. A worker leaving a job at a participating firm in the pool would be able to retain his or her retirement account after taking a job with another of the participating firms. Along these lines, the White House will also propose new ways to make it easier for workers to monitor and reconcile multiple workplace retirement accounts.2,3

Scant details have emerged about how these pooled plans would be created or governed, or how much implementing them would cost taxpayers. Congress will be asked for $100 million in the new budget draft to test new and more portable forms of retirement savings accounts. Presumably, many more details will surface when the proposed federal budget becomes public in February.2,3

Automatic enrollment in IRAs. In the new federal budget draft, the Obama administration will require businesses with more than 10 employees and no retirement savings program to enroll their workers in IRAs. This idea has been included in past federal budget drafts, but it has yet to survive bipartisan negotiations – and it may not this time. Recently, the myRA retirement account was created through executive action to try and promote this objective.1,3

A lower bar to retirement plan participation for part-time employees. Another proposal within the new budget would allow anyone who has worked for an employer for more than 500 hours a year for the past three years to participate in an employer-sponsored retirement plan.2

A bigger tax break for businesses starting retirement plans. Eligible employers can receive a federal tax credit for inaugurating a retirement plan – a credit for 50% of what the IRS deems the employer’s “ordinary and necessary eligible startup costs,” up to a maximum of $500. That credit (which is part of the general business credit) may be claimed for each of the first three years that the plan is in place, and a business may even elect to begin claiming it in the tax year preceding the tax year that the plan goes into effect. The White House wants the IRS to boost this annual credit from $500 to $1,500.2,4

Also, businesses could receive an annual federal tax credit of up to $500 merely for automatically enrolling workers in their retirement plans. As per the above credit, they could claim this for three straight years.2

What are the odds of these proposals making it into the final 2017 federal budget? The odds may be long. Through the decades, federal budget drafts have often contained “blue sky” visions characteristic of this or that presidency, ideas that are eventually compromised or jettisoned. That may be the case here. If the above concepts do become law, they may change the face of retirement plan participation and administration.

Michael Moffitt may be reached at phone 641-782-5577 or email: mikem@cfgiowa.com
Website: www.cfgiowa.com

Michael Moffitt is a Registered Representative with and Securities are offered through LPL Financial, Member FINRA/SIPC. Investments advice offered through Advantage Investment Management (AIM), a registered investment advisor. Cornerstone Financial Group and AIM are separate entities from LPL Financial.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.

Citations.
1 – nytimes.com/2016/01/26/us/obama-to-urge-easing-401-k-rules-for-small-businesses.html [1/26/16]
2 – tinyurl.com/je5uj3r [1/26/16]
3 – bloomberg.com/politics/articles/2016-01-26/obama-seeks-to-expand-401-k-use-by-letting-employers-pool-plans [1/26/16]
4 – irs.gov/Retirement-Plans/Retirement-Plans-Startup-Costs-Tax-Credit [8/18/15]