Learning Center for Tax and Financial Insights

Article Highlights: Tax Reform Form W-4 Withholding Refund or Tax Due As a result of tax reform, most taxpayers will be paying less tax for 2018 than they did in 2017. But that may not translate into a larger refund. Your refund is the amount that your pre-payments (withheld income tax, estimated tax payments, and certain credits) exceed your tax liability, and if the pre-payment also got reduced, you could be in for an unpleasant surprise at tax time. So, why would the pre-payments, particularly withholding, be less? Simply because the current W-4 form on which employers base the amount of tax to withhold, and the withholding tables provided by the government that employers use to determine the amount to withhold, are not sophisticated enough to deal with the revised tax laws. Congress passed the changes at the 11th hour of 2017, without giving the IRS sufficient time to adjust the W-4 form and withholding tables to account for the changed laws. The IRS did come out with a revised W-4 late in February, but there are serious concerns that the revised W-4 and withholding tables are not coming up with the correct amounts based upon the new tax law and that the form itself is much more complicated for employees to complete than prior versions were. In fact, the government is so concerned about this that the IRS issues almost daily notices cautioning taxpayers to double check their withholding. Checking one’s withholding does little good, since it is difficult to determine if your withholding will produce near the desired refund result without also projecting what your tax will be for 2018 and then comparing that to your pre-payments, including withholding, for the year. Prior to the tax reform, you generally could use the tax liability from the prior year, compare that against your current year pre-payments, and be pretty confident in what the bottom line would be for the current year. However, that is not possible for 2018, since the tax computation is significantly different from how it was in 2017 and earlier years.

Article Highlights: One Rollover per Year Rule Exceptions Tax Consequences Disqualified Rollover Early Withdrawal Penalty Tax law permits you to take a distribution from your IRA account, and as long as you return the distribution to your IRA within 60 days, there are no tax ramifications. However, many taxpayers overlook that you are only allowed to do that once in a 12-month period, and violating this rule can have some nasty and unexpected tax ramifications. The one-year period is measured based on the date a distribution is received. If the second distribution is received before the same date one year later, it is a disqualified rollover. Example – Jack takes a distribution from his IRA on June 30 of year one and subsequently rolls over the distribution (puts the funds back into the IRA) within the 60-day rollover period. Jack must wait until June 30 of year two before another distribution is eligible for a rollover. Any additional distributions taken during the one-year waiting period would be taxable. Example – A taxpayer received a distribution from his IRA with Chase bank in February, which he immediately rolled into a new IRA with Wells Fargo. Then, in May, he took a distribution from the Wells Fargo IRA and rolled it back into the IRA at Wells within 60 days. Even though he rolled the exact amount back into the same institution within 60 days, the distribution from Chase had started the running of the one-year waiting period. Thus, his second distribution was in violation of the one-year waiting period and was a taxable distribution. The redeposit of what he thought was a rollover was actually a contribution to the IRA. Like everything taxes, there are exceptions to the one-year rule, including the following: Direct Transfers – As long as IRA funds are transferred directly between trustees, the transaction is not considered a rollover. A taxpayer can make as many direct transfers in a year as he or she wants; in fact, utilizing direct transfers is the preferred way to move funds from one IRA to another because it eliminates certain tax-return reporting issues. Roth Conversions – Traditional IRA to Roth IRA conversions are not considered rollovers for purposes of the one-year rule. Distributions to and from Qualified Plans – Since the one-year rule only applies to IRA-to-IRA rollovers, rollovers to and from other types of retirement plans are not governed by the one-year rule. However, SEPS and SIMPLE plans are treated as an IRA for purposes of the one-year waiting period. Failed Financial Institutions – An IRA distribution made from a failed financial institution by the Federal Deposit Insurance Corporation is generally disregarded for purposes of applying the one-rollover-per-year limitation. Tax Consequences – When the one-year rule is violated, any distribution after the first made within the one-year waiting period will not be treated as a rollover, with the following tax consequences: Traditional IRA – In the case of a traditional IRA, the entire distribution will be taxable, and if the taxpayer is under age 59½ at the time of the distribution, the 10% early distribution penalty will apply to the taxable portion. Roth IRA – In the case of a Roth IRA that is a: o Non-Qualified Distribution – A non-qualified distribution is one where the Roth IRA has not met the five-year aging requirements. Five-year aging generally means the Roth IRA has been in existence for a continuous period of five years, although the first and last years do not need to be full years. A distribution from a Roth IRA that has not met the five-year aging requirements would be a non-qualified distribution, and the earnings would be taxable. Of course, the original contributions are never taxable based on a specific distribution sequence: contributions, then conversions from traditional IRAs or rollovers from qualified plans (first the part that was taxed when the funds went into the Roth and then the nontaxable part), and lastly earnings. A 10% early distribution penalty applies to any amount attributable to the part of the conversion or rollover amount that had to be included in income at the time of the conversion or rollover (the recapture amount). o Qualified Distribution – No tax or penalty applies if a distribution from a Roth IRA is a “qualified distribution,” which is a distribution made after the five-year aging period is met if the taxpayer: - Is age 59½ or older, - Is disabled, - Is deceased, or - Qualifies for the first-time homebuyer exception (maximum $10,000).

Article Highlights: Shared Responsibility Payment Executive Order Hardship Exemption Exemption Certification Number The Affordable Care Act (Obamacare) included a “shared responsibility payment,” which in reality is a penalty for not having health insurance. Along with this penalty came a whole slew of exemptions from the penalty, including some that were designated as “hardship” exemptions. However, the hardship relief from the penalty required pre-approval from the government health insurance marketplace, which required the applicant to provide documentary evidence of the hardship. Once approved, the applicant was issued an exemption certificate number (ECN) that needed to be included on the individual’s tax return to avoid the penalty. Hours after being sworn in, President Trump signed an executive order aimed at reversing the Affordable Care Act. The executive order states that the Trump administration will "seek prompt repeal" of the law. To minimize the "economic burden" of Obamacare, the order instructs the secretary of the Department of Health and Human Services and other agency heads to "waive, defer, grant exemptions from, or delay the implementation" of any part of the law that places a fiscal burden on the government, businesses or individuals. As a result of President Trump’s executive order, the Centers for Medicare & Medicaid Services (CMS) announced on September 12, 2018, that consumers can claim a hardship exemption for not purchasing insurance and avoid the penalty for not being insured for 2018, either by: Obtaining an ECN through the existing application process or Simply entering the hardship code on their federal income tax return (a form of self-certification).

Article Highlights Social Security Traditional IRA Roth IRA Spousal IRA 401(k) Plans SIMPLE Plans Simplified Employee Pension Plans (SEPs) Overall Contribution Limits The Social Security Administration (SSA) recently announced the inflation-adjusted increase in benefits for 2019. SSA’s announcement states that Social Security beneficiaries should expect a cost-of-living increase of 2.8%. However, the same announcement says that for those who are retired at full retirement age, the maximum monthly benefit will go from $2,788 to $2,861, a 2.62% increase of $73 a month. Either 2.62% or 2.8% isn’t much in the overall scope of things, considering part of that increase goes to pay for Medicare premiums and copays for medication. Those retired with only Social Security income struggle just to survive month to month. This should be a wakeup call for still-working individuals who are living (and spending) for the moment and have no, or minimal, retirement plans or retirement savings. It’s almost imperative that individuals include contributions into retirement savings in their budgets, in one form or another, or the inevitable golden years won’t be so golden. Retirement Plan Options – The tax code includes a number of tax-favored ways to put away money for your retirement. However, in all cases, the amount that can be contributed is limited (except as noted) to an individual’s compensation for the year. The most popular plans include: Traditional IRAs – These allow individuals to contribute up to $5,500 in 2018 ($6,500 for those age 50 and over). The contribution is tax-deductible for individuals who are not active participants in an employer’s plan. For those who are active participants in an employer’s plan, the deductibility of the IRA phases out at adjusted gross incomes (AGIs) between: Unmarried Married Filing Jointly Married Filing Separate $63,000 - $73,000 $101,000 - $121,000 $0 - $9,999 Once the AGI exceeds the upper amount, none of the contribution is deductible. Distributions from a traditional IRA are taxable (except for contributions that were not deductible because of the AGI phase-out of deductibility). The annual contribution limit applies jointly to both traditional and Roth IRAs, so no more than the annual limit can be contributed to a combination of the two types of IRA accounts. Roth IRAs – These allow individuals to contribute up $5,500 in 2018 ($6,500 for those age 50 and over). Contributions to Roth IRAs are not tax-deductible but provide the benefit of being tax-free when qualified distributions are taken. Contributions can be made even if the individual is a participant in a qualified employer retirement plan. However, allowable contributions are phased out for higher-income taxpayers in the AGI ranges shown below. Unmarried Married Filing Jointly Married Filing Separate $120,000 - $135,000 $189,000 - $199,000 $0 - $9,999 Spousal IRAs – Spouses with no compensation for the year may contribute to their own IRA based upon their spouse’s compensation. If the unemployed spouse chooses a traditional IRA and the working spouse participates in an employer’s plan, the contribution’s deductibility phases out between $189,000 and $199,000; if a Roth IRA is chosen, the contribution limit also phases out between $189,000 and $199,000, even if the working spouse isn’t covered by an employer’s plan. 401(k) Plans – These are typically available through employers and allow an elective contribution of up to $18,500 for 2018 ($24,500 if age 50 or over). The employee funds the plan by choosing to have a portion of his or her wages deposited into it. Some employers will match a portion of an employee’s contribution, and when that benefit is available, it behooves the employee to contribute at least enough to get the maximum employer match. The amounts contributed to the plan, as well as the earnings and gains on the funds in the plan, are not taxed until withdrawals are made at retirement. SIMPLE Plans – SIMPLE (Savings Incentive Match Plan for Employees) plans, which are not that frequently encountered, can be utilized by employers with 100 or fewer employees. The plans require a 2% or 3% employer match, and the maximum annual contribution for 2018 is $12,500 ($15,500 if age 50 or over). These may be set up as either IRAs (but not Roths) or 401(k)s. Simplified Employee Pension Plans (SEPs) – These are plans that are relatively easy for a self-employed individual to establish. They are quite commonly used by self-employed individuals without employees and may also be used by self-employed individuals who are willing to make contributions on behalf of their employees. The contribution limit for the self-employed individual is the lesser of 25% of their compensation (which equates to 20% of the net profits from self-employment, after deducting the SEP contribution) or $55,000, for 2018. Contributions made on behalf of employees are deductible as a business expense, while the contributions for the self-employed individual are deducted as an above-the-line deduction on the individual’s income tax return.

OverviewSection 529 Plans (named after the section of the IRS Code that created them) are plans established to help families save and pay for college in a tax-advantaged way and are available to everyone, regardless of income. These state-sponsored plans allow you to gift large sums of money for a family member’s college education, while you maintain control of the funds. The earnings from these accounts grow tax-deferred and are tax-free if used to pay for qualified higher education expenses. They can be used as an estate-planning tool as well, providing a means to transfer large amounts of money without gift tax. With all these tax benefits, 529 plans are an excellent vehicle for college funding. Types of PlansSection 529 Plans come in two types, allowing you to either save funds in a tax-free account to be used later for higher education costs, or to prepay tuition for qualified universities. College Savings Plans – These allow you to contribute after-tax dollars that are invested in some sort of savings vehicle. Many of these plans offer more aggressive investments when a child is quite young, which will then be transferred to more conservative investments as the child gets closer to college age. As with any investment, there are no guarantees of growth, and the plans are subject to the normal investment risks, even though state governments sponsor them. A big plus for these plans is that they are not geared towards in-state schools but are meant to be applied to whichever school your child chooses to attend. Prepaid Tuition Plans – As the name implies, a Prepaid Tuition Plan allows parents to pay for college education at today’s tuition rates. By locking in your tuition payments, worries about the increase of tuition costs in the future can be set aside. This gives the assurance that the child will have the money to attend college when that time comes. These plans sound very attractive; however, most of these plans guarantee that you will be covered only if your child chooses to go to a public in-state college or university. Therefore, if your child decides to attend an out-of-state school, you won’t be fully covered, simply because these plans are not meant to fund the higher costs of private or out-of-state education. However, prepaid tuition programs may be set up and maintained by private institutions, and distributions from private tuition plans are eligible for tax-free treatment. ControlIf you make sacrifices to save for a child’s college education, you certainly want to make sure those savings end up being used for college and not some other purpose. 529 Plans allow you to keep control of the account. If you save money for college in a UGMA or UTMA (the name depends on the state in which you live and are essentially custodial accounts, set up for minors), the account becomes the child’s property once he or she reaches the age of majority – usually 18 or 21 and you lose control. Unlike UGMA/UTMAs, Section 529 plans are not irrevocable gifts and you retain control. Control stays in the hands of the adult responsible for the account. Generally, this is the same person who contributed the money, but it doesn’t have to be the case. Someone else, for example a grandparent, could make the donation but name the child’s parent as the account owner. Money does not come out of the account without permission from the account owner. If the designated beneficiary of the plan decides not to go to school, then the account owner can simply change the beneficiary to someone else in the family. Tax BenefitsThere is no federal tax deduction for making contributions to a 529 plan, but taxes on the earnings within the plan are tax-deferred while they are held in the account, and are tax-free when withdrawn to pay for qualified education expenses. This allows you to accumulate money for college at a much faster rate than you can in an account where you had to pay tax on the investment gains and earnings. In the graph below, compare the growth of $10,000 accumulating tax-free (the purple line) to the same $10,000 after taxes (the black line). To be tax-free when withdrawn, the funds must be used to pay for qualified college expenses such as tuition, room and board, books, supplies, and equipment. The more time you have until your child needs the money for college, the more significant this tax-free compounding becomes. How Much Can Be Contributed?Unlike the Coverdell Education Savings Accounts that limit the anual contribution to $2,000, Sec 529 Plans allow you to put away larger amounts of money. There are no income or age limitations for the Sec 529 Plans. The maximum amount that can be contributed per beneficiary is based on the projected cost of a college education and will vary between state plans. Some states base their maximum on an in-state four-year education, while others use the cost of the most expensive schools in the U.S., including graduate studies. The limits for most states range from $235,000 to $520,800. Generally, once an account reaches the state designated maximum, additional contributions cannot be made, but that doesn’t prevent the account from continuing to grow. Contributions to a 529 college savings plan must, by Federal law, be made in cash and always consist of after-tax money. Most programs also have a minimum contribution that is within everyone’s budget. Many have payroll or automatic withdrawal programs. PenaltiesIf the earnings from the 529 Plan are withdrawn and not used for higher-education expenses, the earnings withdrawn will be subject to both regular taxes and a 10% penalty. Before you become concerned, refer back to Figure #1. Had you not utilized the tax deferral benefits of the Sec 529 Plan, you would have accumulated significantly less in the account, which will generally more than offset the 10% penalty. You can avoid penalties by making a tax and penalty-free rollover from one 529 Plan to another, and remember that you are able to change beneficiaries to a 529 Plan without penalty. Impact on Financial Aid

Article Highlights: Tapping Retirement Funds Taxability Traditional IRAs Roth IRAs Qualified Plans Withdrawal Option Early Retirement Separation from Service Disability Special Financial Needs Unreimbursed Medical Expenses Qualified Reservist Distributions Medical Insurance Higher Education First-Time Homebuyer Exceptions Special Situations If you are suddenly in need of a substantial amount of cash, probably the last thing you should do is tap your retirement funds. They are the key to a financially comfortable retirement. The younger you are, the less likely you are to think about saving for retirement, but you certainly don’t want to end up living off of only Social Security. However, there are times when there might not be any other alternative than dipping into your 401(k), IRA or other retirement plan. In that case, you have to be concerned not only with any tax liability, but also early withdrawal penalties if the funds are withdrawn before reaching age 59 1/2 Plus, some distributions may only be partially taxable and some not taxable at all, while others are fully taxable. Like everything in the U.S. tax code, the rules relating to pension or other retirement plan distributions are complicated and governed by a variety of provisions. This article describes these various rules so you can see how they would apply to a withdrawal you might be contemplating. TaxabilityTaxability depends upon the type of retirement vehicle your retirement funds are invested in and sometimes depends on whether the contribution was made with post-tax or pre-tax dollars. Post-tax means the contribution was made with funds that were already taxed and are not included in income when later withdrawn. Pre-tax means the contribution was made with income that was not taxed, and as you might expect, are taxable when later withdrawn. Here is how that plays out in different types of retirement vehicles: Traditional IRA – Contributions to traditional IRAs are made with post-tax dollars, but a deduction for the contribution is allowed on the individual’s tax return. Thus, distributions are treated like pre-tax contributions and are taxable, as are the earnings and gains made on the contributions. There is an exception because the deductibility of traditional IRA contributions is phased out for certain higher-income taxpayers, in which case the portion of the contribution that is not deductible is tax-free when distributed. In this case, each distribution will include a prorated portion of the non-deductible contributions and that prorated amount will not be taxed. There is also a penalty of 10% of the taxable distributions from traditional IRAs if the distribution occurs before the account owner is age 59 1/2 and none of the exceptions explained below apply. Some states also assess an early withdrawal penalty. The primary benefit of a traditional IRA is the deductibility of the contribution. Roth IRA - Contributions to a Roth IRA are made with post-tax dollars. However, unlike a traditional IRA, the contributions are not deductible because the distributions from a Roth IRA that meet a five-year aging requirement and are distributed after age 59 1/2 are tax-free. These IRAs were designed so that their investment earnings would be tax-free when the individual retires. However, the original contributions, excluding the earnings and traditional IRA-to-Roth conversions that have not met the five-year aging rule, can be withdrawn at any time without any tax or penalty consequences. The primary benefit of a Roth IRA is the tax-free investment earnings accumulation. Qualified Plans – Generally, contributions to employer-sponsored qualified plans, including 401(k)s, simplified employee pension plans (SEPs), SIMPLE plans, tax sheltered annuities and others are made with pre-tax dollars and distributions are taxable and subject to the 10% early withdrawal penalty if withdrawn before age 59 1/2. However, some plans may offer a Roth option wherein the contributions are made with post-tax dollars; in these arrangements, the tax treatment is the same as a Roth IRA. Retirement Withdrawal OptionsThe following retirement withdrawal options are taxable as described above, and penalty free. Distribution not meeting one of the following options will be subject to the 10% early withdrawal penalty in addition to any tax liability. After reaching age 59 1/2 - Tax law considers distributions after reaching age 59 1/2 as made during normal retirement and withdrawals from all plans are penalty-free. Early Retirement – This form of retirement essentially allows a taxpayer to retire early and take penalty-free withdrawals before reaching age 59 1/2 For qualified plans, this exception applies only for distributions that begin after the taxpayer separates from service. To qualify for early retirement and avoid the 10% early withdrawal penalty, the payments: Must be part of a series of substantially equal payments over the taxpayer’s life, or the joint life expectancies of the taxpayer and the taxpayer’s beneficiary, and Payments under this form of retirement must continue for at least 5 years, or until the taxpayer reaches age 59½, whichever is the longer period. This 5-year rule does not apply if a change from an approved distribution method is made because of the death or disability of the IRA owner. Example: Dan began taking eligible payments at age 56 on December 1, 2017. He may not take a different distribution or alter the amount of the payment until December 1, 2022, even though his fifth payment was taken on Dec. 1, 2021. Example: Sue began taking substantially equal periodic payments on December 1, 2011. She turns 59 1/2 on July 1, 2018. She may not take a different distribution or alter the amount of the payment until July 1, 2018.