Mid-Year Steps to Save on Your Taxes (Fidelity)

Midyear tax check: 9 questions to ask

A midyear tax checkup will help you to prepare for the tax consequences of life changes.

• FIDELITY VIEWPOINTS 
• – 06/28/2017

• Taxes 
• 401(k) 
• IRA 
• Rollover IRA

 

 
 
 
 
 

Key takeaways

✔ Evaluate the tax impact of life changes such as a raise, a new job, marriage, divorce, a new baby, or a child going to college or leaving home.

✔ Check your withholding on your paycheck and estimated tax payments to avoid paying too much or too little.

✔ See if you can contribute more to your 401(k) or 403(b). It is one of the most effective ways to lower your current-year taxable income.

In the midst of your summer fun, taking time for a midyear tax checkup could yield rewards long after your vacation photos are buried deep in your Facebook feed.

Personal and financial events, such as getting married, sending a child off to college, or retiring, happen throughout the year and can have a big impact on your taxes. If you wait until the end of the year or next spring to factor those changes into your tax planning, it might be too late.

“Midyear is the perfect time to make sure you’re maximizing any potential tax benefit and reducing any additional tax liability that result from changes in your life,” says Gil Charney, director of the Tax Institute at H&R Block. 

Here are 9 questions to answer to help you be prepared for any potential impacts on your tax return.

1. Did you get a raise or are you expecting one?

The amount of tax withheld from your paycheck should increase automatically along with your higher income. But if you’re working two jobs, have significant outside income (from investments or self-employment), or you and your spouse file a joint tax return, the raise could push you into a higher tax bracket that may not be accounted for in the Form W-4 on file with your employer. Even if you aren’t getting a raise, ensuring that your withholding lines up closely with your anticipated tax liability is smart tax planning. Use the IRS Withholding Calculator; then, if necessary, tell your employer you’d like to adjust your W-4.

Another thing to consider is using some of the additional income from your raise to increase your contribution to a 401(k) or similar qualified retirement plan. That way, you’re reducing your taxable income and saving more for retirement at the same time. 

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2. Is your income approaching the net investment income tax threshold?

If you’re a relatively high earner, check to see if you’re on track to surpass the net investment income tax (NIIT) threshold. The NIIT, often called the Medicare surtax, is a 3.8% levy on the lesser of net investment income or the excess of modified adjusted gross income (MAGI) above $200,000 for individuals, $250,000 for couples filing jointly, and $125,000 for spouses filing separately. In addition, taxpayers with earned income above these thresholds will owe another 0.9% in Medicare tax on top of the normal 2.9% that’s deducted from their paycheck.

If you think you might exceed the Medicare surtax threshold for 2017, you could consider strategies to defer earned income or shift some of your income-generating investments to tax-advantaged retirement accounts. These are smart strategies for taxpayers at almost every income level, but their tax-saving impact is even greater for those subject to the Medicare surtax.

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3. Did you change jobs?

If you plan to open a rollover IRA with money from a former employer’s 401(k) or similar plan, or to transfer the money to a new employer’s plan, be careful how you handle the transaction. If you have the money paid directly to you, 20% will be withheld for taxes and, if you don’t deposit the money in the new plan or an IRA within 60 days, you may owe tax on the withdrawal, plus a 10% penalty if you’re under age 55.

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4. Do you have a newborn or a child no longer living at home?

It’s time to plan ahead for the impact of claiming one more or less dependent on your tax return.

Consider adjusting your tax withholding if you have a newborn or if you adopt a child. With all the expenses associated with having a child, you don’t want to be giving the IRS more of your paycheck than you need to. 

If your child is a full-time college student, you can generally continue to claim him or her as a dependent—and take the dependent exemption ($4,050 in 2017)—until your student turns 25. If your child isn’t a full-time student, you lose the deduction in the year he or she turns 19. Midyear is a good time to review your tax withholding accordingly.

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5. Do you have a child starting college?

College tuition can be eye-popping, but at least you might have an opportunity for a tax break. There are several possibilities, including, if you qualify, the American Opportunity Tax Credit (AOTC). The AOTC can be worth up to $2,500 per undergraduate every year for four years. Different college-related credits and deductions have different rules, so it pays to look into which will work best for you.

Regardless of which tax break you use, here’s a critical consideration before you write that first tuition check: You can’t use the same qualified college expenses to calculate both your tax-free withdrawal from a 529 college savings plan and a federal tax break. In other words, if you pay the entire college bill with an untaxed 529 plan withdrawal, you probably won’t be eligible for a college tax credit or deduction.

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6. Is your marital status changing?

Whether you’re getting married or divorced, the tax consequences can be significant. In the case of a marriage, you might be able to save on taxes by filing jointly. If that’s your intention, you should reevaluate your tax withholding rate on Form W-4, as previously described.

Getting divorced, on the other hand, may increase your tax liability as a single taxpayer. Again, revisiting your Form W-4 is in order, so you don’t end up with a big tax surprise in April. Also keep in mind that alimony you pay is a deduction, while alimony you receive is treated as income.

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7. Are you saving as much as you can in tax-advantaged accounts?

OK, this isn’t a life-event question, but it can have a big tax impact. Contributing to a qualified retirement plan is one of the most effective ways to lower your current-year taxable income, and the sooner you bump up your contributions, the more tax savings you can accumulate. For 2017, you can contribute up to $18,000 to your 401(k) or 403(b). If you’re age 50 or older, you can make a “catch-up” contribution of as much as $6,000, for a maximum total contribution of $24,000. Self-employed individuals with a simplified employee pension (SEP) plan can contribute up to 25% of their compensation, to a maximum of $54,000 for 2017.

This year’s IRA contribution limits, for both traditional and Roth IRAs, are $5,500 per qualified taxpayer under age 50 and $6,500 for those age 50 and older. Traditional and Roth IRAs both have advantages, but keep in mind that only traditional IRA contributions can reduce your taxable income in the current year.

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8. Are your taxable investments doing well?

If your investments are doing well and you have realized gains, now’s the time to start thinking about strategies that might help you reduce your tax liability. Tax-loss harvesting—timing the sale of losing investments to cancel out some of the tax liability from any realized gains—can be an effective strategy. The closer you get to the end of the year, the less time you’ll have to determine which investments you might want to sell, and to research where you might reinvest the cash to keep your portfolio in balance.

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9. Are you getting ready to retire or reaching age 70½?

If you’re planning to retire this year, the retirement accounts you tap first and how much you withdraw can have a major impact on your taxes as well as how long your savings will last. A midyear tax checkup is a good time to start thinking about a tax-smart retirement income plan. 

If you’ll be age 70½ this year, don’t forget that you may need to start taking a required minimum distribution (RMD) from your tax-deferred retirement accounts, although there are some exceptions. You generally have until April 1 of next year to take your first RMD, but, after that, the annual distribution must happen by December 31 if you want to avoid a steep penalty. So if you decide to wait to take your first RMD until next year, be aware that you’ll be paying tax on two annual distributions when you file your 2018 return.

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No significant changes in your life situation or income?

Midyear is still a good time to think about taxes. You might look into ways you can save more toward retirement, gift money to your children and grandchildren to remove it from your estate, or manage your charitable giving to increase its tax benefits and value to beneficiaries. A little tax planning now can save a lot of headaches in April—and maybe for years to come.

Money Lessons -- You Don't Want to Learn These the Hard Way (bankrate.com)

8 personal finance lessons you must master by age 40

By Jennie L. Phipps • Bankrate.com

iStock.com/gilaxia

8 money lessons to learn by age 40

If you've hit 40 and managed to avert a midlife crisis -- congratulations. That sporty red convertible at the dealer showroom can wait if you want to be smart about money management.

Bankrate offers 8 personal finance lessons that everyone should know by age 40. Young precocious adults who adopt these lessons early will not be sorry, and late learners still have time to catch up. Read on to learn the important financial facts of life.

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Money is freedom

Figure out your net worth and, after you get over the shock, have a recovery plan. You don't have to be wealthy, but you do have to have enough that you aren't a slave to the shortfall.

"After getting on a budget, a lot of people feel like they've gotten a raise even though their income hasn't changed," says Dave Ramsey, a Tennessee-based financial adviser and media personality, who bases his approach on mistakes he personally made.

Ramsey offers no-brainer personal finance lessons that most people can follow: "Do a written budget every month before the month begins. Give every dollar of income a name so you know where it is going. Include a line for how much you want to save each month. Then, stick to the plan."

iStock.com/KatarzynaBialasiewicz

No relationship is perfect

Working it out is usually cheaper than calling it quits. Even after the relationship is long over, getting along with your ex is cheaper than fighting over the kids or whether or not both spouses are paying their share.

"Divorce isn't good for your pocketbook. It is a long, messy and expensive process," says Jay Zagorsky, a research scientist at The Ohio State University who has studied the cost of divorce for nearly 20 years.

His research demonstrated that on average, divorce drops a person's wealth overall by 77%. "Wealth starts declining well before the final decree, and after divorce, people don't suddenly start with a clean slate," he says.

In other words, it's cheaper to keep her (or him).

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You can't buy security

Insurance can help, but it wasn't meant to pay routine costs. Its purpose is to cover devastating financial losses.

"Many people tend to purchase coverage with low deductibles, which can be costly. Because states have low liability limits, people think they should start there. But for most individuals, those limits are woefully inadequate, so they end up paying a lot for insurance that doesn't cover enough," says Robert Hoyt, who heads the Risk Management and Insurance Program at the University of Georgia.

Someone with lots to lose -- a home, a car and future income -- is better off picking a plan with high deductibles, he says, and planning only to claim when there is a devastating loss that the insured can't pay for otherwise. In other words, you collect when the house burns down or the car is totaled or the accident causes major injury.

"Assess what you can afford with high limits of loss and then add a personal umbrella, which can be cost-effective and provide protection if you are faced with tens of thousands (of dollars) in losses," Hoyt advises.

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Credit is a tool

Becoming an expert at using credit will improve your life.

At this stage, you're likely dealing with a mortgage, car loans and children entering college. "A healthy credit score is vitally important to you," says Bruce McClary, vice president of public relations and communications for the nonprofit National Foundation for Credit Counseling.

If you examine your credit score and you don't like what you see, chances are you haven't paid your bills on time. "Paying on time counts for about one-third of your score," McClary says.

Committing to paying everything on time is the obvious solution to this problem.

It also pays to check your credit report carefully for credit killers, such as identity theft or inaccurate reports. "There are a lot of those problems out there," McClary says.

Check your credit report for free at myBankrate.

Finally, at your age, you ought to be working to pay off debt and keep balances low, he says. "Focus on power-paying those balances and getting rid of them as fast as possible."

This will give you more credit flexibility if you really need to borrow because you have a health emergency, want to start a business or need to replace the roof. "A solid-gold credit score will make borrowing for any of these easier," McClary says.

iStock.com/Csondy

Keeping up with the Joneses is a no-win

As humorist Will Rogers is credited for saying: "Too many people spend money they haven't earned to buy things they don't want to impress people that they don't like."

Envy was one of the "7 deadly sins" and a route to hell, says Susan Matt, chair of the history department at Weber State University in Ogden, Utah, and the author of "Keeping Up With the Joneses: Envy in American Consumer Society, 1890-1930."

"Yesterday, envy was a sin; today, it is one of the fundamentals of our consumer-driven society," she says.

"People think the sky is the limit. When they get what they want, they want the next step up. People have never-ending desires, and they are never satisfied."

Is that bad? "It keeps our economy moving," she says. "But I don't think it makes people any happier."

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You can count on uncertainty

Trust us: Jobs don't last forever, and neither does excellent health.

The best hedge against poor health, job loss or other unforeseen setbacks is a financial plan that will help you navigate the shoals until you get back on your feet, says Chris Hogan, author of "Retire Inspired" and a popular speaker about personal finance issues.

"The definition of insanity is doing the same thing over and over and expecting a different result," Hogan says. "If you don't have a plan, you keep doing more of the same, and you never have anything to show for it."

To get around this conundrum, "you have to have an awareness of where you are now, an understanding of what it will take to get there and the determination to work your plan," Hogan says.

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Everybody needs an ace in the hole

You need a financial plan B that doesn't count on another person -- not even the love of your life. It's not disloyal to figure out an answer to the question, "How will I support myself if X happens?" whether X is divorce, death, disability or something else.

"'Everybody Loves Raymond' explained it best,'" says Cindy Hounsell, president of the Women's Institute for a Secure Retirement, or WISER.

Here's the exchange on the TV episode that she's referring to:

Debra: Ray and I were talking about wills, and he doesn't want to make one.

Robert: Oh, why not?

Debra: He thinks it's going to tempt fate.

Robert: No, no, silly. If you don't have a will, you're tempting fate. "I don't need a will. I'm gonna live forever." Manhole!

Ray: I don't know.

Robert: Raymond, listen to me. You need to have a will and eat a fibrous breakfast every morning and nothing can touch you.

Hounsell isn't so sure about the fibrous breakfast, but she thinks the will part is right, along with savings and insurance. "Anybody who is dependent on somebody else to make ends meet -- or even if you just depend on yourself -- you need a plan for what you're going to do when that goes away," she says.

iStock.com/AWelshLad

Working forever isn't a retirement plan

You just can't work forever.

Author Chris Hogan says, "I have a friend who was diagnosed at 48 with early onset Alzheimer's. He knows life has changed, but he can't do anything about it. When people say to me, 'I love what I do and I plan to work forever,' I tell them about my friend and ask them, 'What are you going to do if your mind or your body won't allow you to keep working?"'

Having a retirement savings plan is key. "The earlier you start, the longer your money works for you and the greater your chance of amassing a nice nest egg. It's a snowball effect. You start small and it builds," says Brian Hogan, director of small-business retirement products for Fidelity.

Or as Chris Hogan says, "It is never too early or too late to start saving."

Motley Fool NINE FACTS YOU NEED TO KNOW ABOUT INVESTING

Sometimes it just takes a number or two to deliver a life changing realization.  

• You may be more prepared for retirement than you think.Say, you have only $75,000 socked away for retirement, and you are already 45. You have a lot more saving and investing to do in order to build a comfortable retirement. But, you are still above average. Fifty-three percent of American workers have saved less than $25,000 for retirement (excluding the value of their home), and 35% have less than $1,000 saved. 

• You can probably amass much more money than you think. If you have 30 years until retirement and you can sock away $8,000 per year that grows by an annual average of 8%, you can accumulate close to $1 million. You have only 20 years until retirement and can sock away $10,000 a year growing at 8% annually, you will end up with close to $500,000. 

• It is kind of easy to outperform most managed stock mutual funds. An inexpensive, broad market index fund is likely to outperform most managed stock mutual funds. For example, the S&P 500 outperformed about 80% of large cap stock funds over the decade concluding at the end of June, 2015. 

• Dividends can turbocharge your investing. A study of Russell 3000 companies dating back to 1992 found dividend payers returned about four percentage points more per year, than the average non-payers, when weighted equally. Between 1927 and the end of 2012, reinvested dividend income made up 42% of large cap returns, 36% of mid cap returns and 31% of small cap stock returns. 

• Day trading or excessively active trading can wreck your returns. The most active traders reaped the lowest returns. Indeed, between 1992 and 2006, 80% of active traders lost money, and only 1% of them could be called predictably profitable. 

• Inflation can cut your purchasing power in half. Over the long haul, inflation has averaged about 3% annually. That number may not seem bad, but over 20 years it is enough to give $100,000 the purchasing power of just $54,000. 

• Do not count on your home as an investment. Think of your home as a comfortable place to live, but not necessarily a great investment. A Nobel-prize-winning economist’s data suggest that housing prices have grown at a compound annual rate of just 0.3% over the past century (inflation-adjusted), while S&P 500 has averaged roughly 6.5%. 

• Stocks rose 1,100-fold over the last 70 years. Over the last 70 years, the S&P 500 advanced 1,100-fold, which is enough to turn a single modest $1,000 investment into more than a million dollars. Consider that statement in light of the many double-digit market crashes, recessions, and even the Great Depression. The lesson: over the long haul, stock markets tend to rise, not just in a straight line. 

• You can slash your tax rate nearly in half by being a long-term investor. The capital gains rate on short term investments (those held a year or less) is the same as your income tax, which is 25% for most people and 28% for higher earners. On long-term capital gains, though (from assets held for more than a year), most people will face a tax hit of just 15%.

Put these statistics together, and the conclusion is clear. Have a retirement plan where you save diligently and invest effectively, perhaps in index funds, dividend paying stocks, or both. Beware the erosive power of inflation and steer clear of day trading. Enjoy your house, but do not plan on it making you rich, and be tax smart by aiming to invest for the long term. Not so foolish.

Don't make these retirement account mistakes (Forbes)

Retirement Account Mistakes--Not For Dummies
Janet Novack

a guide to some of the traps created by the insanely complicated rules surrounding IRAs, 401(k)s and other retirement accounts


No, this is not another story lecturing you to save more, diversify, control your investment costs, or ignore the hot stock tip from your brother in law who did time for securities fraud. You’re no dummy.

What this is, instead, is a guide to some of the traps created by the insanely complicated rules surrounding IRAs, 401(k)s and other retirement accounts —traps that can snare not only smart investors, but also financial advisors, lawyers, accountants, and yes, even the Internal Revenue Service itself.

Lest you think that’s hyperbole, consider this: a U.S. Tax Court judge  ruled last year that a tax lawyer couldn’t use an IRS publication in his defense, because the IRS itself  had misinterpreted a provision of the law relating to IRA rollovers. “Even the IRS is confused,’’ marvels CPA Ed Slott, who makes a nice living training other financial pros about IRA rules and fixing the mistakes they and their clients make.

The sad fact is a normal human being not in Slott’s business can’t know all the rules. But taking a few minutes to acquaint yourself with the more common mistakes can help keep you safe and out of the IRS’ penalty zone. At the least, you’ll have a sense of when you need to consult IRS publications (which, despite that court ruling, you can usually rely on) or speak to a retirement account specialist at the financial institution where your IRA or 401(k) is held, or maybe even pay an expert for help.  Two key IRS Publications are  590a on IRA contributions and 590b on IRA distributions.  (There used to be just one publication 590, but it was so long, what with all the rules, that the IRS split it into two.) Note that part of what makes this all so complicated is that there are more than a dozen different types of retirement accounts, each with its own sometimes differing rules. So to be fair, Congress, not the IRS, deserves most of the blame for this mess.

To assemble my list of  25 Retirement Account Mistakes Smart People Make, I  consulted Slott and Robert Keebler, another CPA/IRA expert, and reviewed court cases, private letter rulings and government reports. Most of the mistakes  relate to early withdrawals, inherited IRAs, required minimum distributions and account rollovers. But  you can also get yourself in trouble putting the wrong thing in an IRA. (Tempted to hold gold in your IRA? The gold must be of a certain type and must  be kept with your IRA custodian, not under your bed.) Of course, this list of 25 mistakes is by no means exhaustive. Here’s a bonus tip that’s not on it: never ever, ever put a master limited partnership in a retirement account.

The discussion below offers some extra background on two areas where mistakes are particularly common.

Early withdrawals woes

Withdrawals taken from a traditional IRA or 401(k) before age 59 ½ are generally subject to not only ordinary income taxes, but also a 10% penalty  on the taxable amount. Fortunately, there are 11 separate exceptions, detailed here, that can get you out of the 10% extra hit. On their 2013 tax returns, 1.7 million taxpayers reported that they took early distributions, but only 1.2 million indicated they were subject to the additional 10% tax penalty, the IRS estimates.

The problem is that some of those 500,000 folks who reported themselves exempt from the penalty will get audited by the IRS and then hit with the 10% early withdrawal penalty and possibly an additional penalty for negligence.  That’s because they got the exceptions wrong. One common mistake: thinking you can take an early penalty free withdrawal from a 401(k) to pay college or graduate school bills, or to buy a first home, when in fact these penalty exceptions only apply to IRA withdrawals.

In one classic case, an accountant who had left Deloitte to earn his PhD  got hit with the 10% penalty for using $30,000 from his 401(k) to finance his graduate studies and buy a first home. The tax court rejected his argument that since he could have transferred the 401(k) money to an IRA first, and then used it penalty free for those very purposes, he shouldn’t have to take the extra 10% hit. The judge said he sympathized with the accountant’s confusion, and agreed that the law is “highly technical,’’ but concluded that, well,  the law is the law.

Another common misconception Slott flags: that you can get out of the 10% penalty because you took the money out to deal with a general financial hardship. The widespread confusion may stem from the fact that some employers allow early “hardship” withdrawals from 401(k)s. But that doesn’t get the employee out of paying either tax or the 10% early withdrawal penalty.

If you have a financial hardship, there may be other ways to tap retirement early penalty free. For example, if you’re 55 or older and lose (or leave) your job, you can tap money from your 401(k) penalty free– so long as you don’t roll it into an IRA first. (Yet another trap.)


Death traps

With a growing share of families’ assets in retirement accounts, mistakes made while passing them on are a big deal.  One easy to understand and fix mistake:  failing to keep your beneficiary forms up to date. The form on file with your IRA custodian, not any other estate document, and not an unfiled form you’ve stuck in your desk drawer, determines who gets your IRA.  If you want to make sure your ex-spouse (or an ungrateful child) doesn’t get your IRA, take him or her off that form as well as out your will.

Another batch of inheritance mistakes has to do with “stretch” IRAs. You can roll over an inherited IRA into your own name only if you inherit it from a spouse. (Although you should usually wait until you’re  older than 59 ½ to roll over your late spouse’s IRA  because withdrawals from an inherited IRA can be taken at any age without paying the 10% early withdrawal penalty. Once you roll an account over into your own name, you lose that early withdrawal flexibility.) But any individual beneficiary can retitle an IRA as an “inherited IRA” and stretch out withdrawals over his or her own life expectancy, thus gaining decades of tax deferred, or (in the case of a Roth IRA tax free) growth.

Although some in Washington, including the Obama Administration, would like to eliminate the stretch IRA,  this valuable tax break is available for now. Available, that is, so long as you (the IRA owner) or your heirs don’t make any mistakes.  One huge no-no is rolling an IRA inherited from someone other than a spouse into your own name. If you do that, the whole amount is immediately taxable. Instead, as a nonspousal heir, you must  retitle the IRA, including the original owner’s name and that it is inherited, e.g., “John X. Smith II,  deceased, inherited IRA for the benefit of John X Smith III.”  Similarly, if a trust is named as an IRA beneficiary, you can’t actually transfer the IRA into the trust. Instead, you retitle the IRA and deposit the yearly payouts in the trust. (Note that if you want to change the financial service company holding an inherited IRA,  you must do it in a trustee to trustee transfer.)

What about the mistakes IRA owners make that limit their heirs’ ability to stretch out the account’s life? A common one is naming your estate as your beneficiary on an IRA form. In many cases, that will force the IRA to be distributed within five years, cutting short the potential tax deferral or tax free growth. (The exact rule is this: funds in a Roth IRA left to an estate must be withdrawn within five years. Period. For a  traditional IRA left to an estate, if the deceased turned 70 1/2—the age at which a traditional IRA owner must start taking required minimum distributions–before his death, payments can be stretched out for what would have been his remaining life expectancy, according to IRS tables. That is usually more than five years, but it is probably less than the life expectancy of individual heirs, had they been named as individual beneficiaries.)

A related mistake is neglecting to name a contingent beneficiary. The problem? Should your primary beneficiary die before you, the IRA will likely go to your estate, again cutting short tax deferral. Moreover, if you name a primary beneficiary (say your child) and a contingent beneficiary (say your grandchild), then your child has the option of  ”disclaiming” the IRA in favor of your grandchild.

Still other mistakes have to do with not taking the proper required minimum distributions from inherited IRAs. If you’ve just inherited an account, read William Baldwin’s 11 Step Instruction Guide To Inherited IRAs, Inherited Roth Accounts And RMDs. And for in-depth advice on the best way to pass on a retirement account, spring for a copy of  Estate Planning Smarts by lawyer and former Forbes Senior Editor Deborah L. Jacobs.

Congress Just Cut Social Security for Boomers (Forbes)

If you’re married (or divorced after a 10 year or longer union), it’s time to forget part of what you’ve read about Social Security claiming strategies for couples... That’s because the arcane  “file and suspend” strategiesthat had allowed some married couples and divorcees to receive tens of thousands in extra government retirement benefits are being curbed by the two year bipartisan budget deal that just passed Congress.

...

But good policy or not, the changes still don’t make a couple’s decision about when to claim benefits simple. And in the short term, they will make things even more complicated for those approaching retirement,  as they wrestle with a phase-in of the new restrictions that could cause them to revise existing retirement plans.

The most sweeping new restrictions affect those who will turn 62 after 2015 , in other words, those born in 1954 or later, which includes more than half the Baby Boomers. Some older Boomers could also take a hit, although anyone who is already using the strategy –or adopts a file and suspend strategy in the next six months—is protected in the final legislation. (Note: an earlier version of the budget that would have cut benefits for some who had already used file and suspend was wisely changed. 

Here some background is needed. Social Security’s  “full” or “normal” retirement age is 66 for those born from 1943 through 1954. It rises two months a year after that and is 67 for anyone born in 1960 or later. (Expect that to rise in the future for the after 1960 crowd.) But regardless of your full retirement age, you can claim your retirement check anytime after 62.The longer you wait the bigger your ultimate check will be. After full retirement age, each month you wait until 70 raises your benefit by 0.67%. That’s an at least 8% bigger monthly check for each year you delay. (If you’re still working and earning good money your benefit could go up even more than 8% a year, since you might qualify for a bigger base benefit.) This 8% a year delayed retirement credit is a particularly good deal for those with Methuselah genes. (More on determining your personal life expectancy is here.)

Note that only one partner of a married couple can claim spousal benefits. But if a couple divorced after at least 10 years of marriage, and never remarried, each could claim spousal only benefits beginning at age 66, while his or her earned benefit continued to grow. Say two career long high earners married young, divorced after 10 years, never remarried and turned 66 this past January. Even if they were both still working and pulling down big bucks, each could claim a “spousal” benefit equal to 50% of the other’s benefit. The maximum benefit for a high earner retiring at 66 this year is $2663. So for four years, each ex-spouse could collect half of that —$1,331.50 a month—based on the earning history of the other, while allowing his or her own benefits to grow. (Thanks to that 2000 law, after you reach full retirement age, there’s no limit to how much you can earn, while also collecting benefits.) At 70, each ex would collect his or her own larger benefits and the spousal benefits would end. That’s an extra $64,000 or so for each of them out of Social Security’s coffers.

Keep in mind that during the next six months, anyone who begins taking spousal benefits based on a file and suspend gambit, can continue to benefit from it until 70.

And after that? The loophole will be shut in two stages. After the six month window closes, if someone claims and suspends his benefits, then all checks based on his earnings—including spousal and dependent benefits— will be cut off. So if both husband and wife are 63 now, they won’t be able to use file and suspend. (That also means someone with a minor or disabled child will no longer be able to allow his or her own retirement benefit to grow between full retirement age and 70, while the dependent receives benefits.)

Some mixed age couples will be unaffected. For example, if a now 63-year-old woman has a 67-year-old husband, then when she turns 66 she can take spousal benefits based on his earnings. The reason, of course, is that by then he’ll be 71 and will be receiving benefits i.e. not in suspension.

The second stage of the loophole closer? Those who turn 62 after this year will lose the ability to take only spousal benefits at their full retirement age. In effect, those born in 1954 and later, when they apply for benefits, will be deemed to be applying for their own benefits, as well as a spousal check. (Remember, they only get the one that’s larger.)

Put another way, it will no longer be possible for both spouses to let their earned benefits grow until 70, while one collects a small check. But –and this is crucial—the survivor’s benefit is untouched. At the death of the first spouse, the survivor can take whichever check is larger. The result, says Michael Kitces, a financial planner who has written extensively on Social Security claiming strategies, is it usually makes sense for one spouse to delay benefits until 70, but it’s “very uncommon for it to be best for both to wait until 70.’’ Note that the changes also won’t affect the ability of a divorced, never-remarried spouse to claim their ex’s full benefit at his or her death— if it’s larger than their own check. (You can find Kitces’ explanation of the changes here.)

To determine your own best strategy going forward, wait a few weeks for the calculators to be updated, and then run one. (Kotlikoff sells a sophisticated calculator for $40 a year here and you can find pretty good free calculators atAARP and T. Rowe Price , among other places. You can also get an estimate of your benefits from Social Security here.) Of course your personal life expectancy, as well as your other financial resources  will also influence your decision about when to claim benefits, which is one of the most consequential financial decisions many retirees will make.

How to Pay Less Taxes on your RMDs (Required Minimum Distributions from IRA) and what is a QLAC? by Natalie Choate

Age 70 1/2: Think Through Your RMD Choices

Buying a qualified longevity annuity and tactically timing the first RMD could reduce the tax hit.

Natalie Choate, 05/08/2015

In 2015, we are looking at planning ideas for different life stages. This month: The year the IRA owner reaches age 70 1/2. 

The year the IRA owner reaches age 70 1/2 is his or her first "distribution year." It's the first year for which there is a required distribution. Unlike with later years, however, the IRA owner gets a one-time special break in the age 70 1/2 year: The minimum distribution for that year is not required to be taken until April 1 of the following year. In all other years for which there is a required minimum distribution, or RMD, it must be taken by Dec. 31 of the distribution year. 

If the client's income is still "too high," and he or she doesn't want or need to take the RMD to pay living expenses, continue to look for ways to reduce the RMD, such as rolling into an employer plan if still working, Roth conversions, or purchasing a qualified longevity annuity (QLAC), discussed below. (This tactic could also be used in years prior to the age 70 1/2 year.) 

Buy a QLAC?A longevity annuity is an annuity contract that does not start paying you until you reach age 85. It eventually pays you a life income, but the income does not start until that later age, meaning that your investment (if made when you are many years younger than 85) has many years to accumulate and grow, so the income you eventually get will be larger. The purpose is to insure against "living too long"--outliving your income. 

Normally such delayed annuities are not "legal" investments for IRAs, because the minimum distribution rules require IRA-owned annuities to start paying out no later than age 70 1/2. 

But the IRS has made an exception to permit IRAs to purchase "qualified" longevity annuities (QLACs) with up to $125,000 of the IRA balance, or 25% of the IRA owner's total IRA balance if less. When the QLAC is purchased, the purchase price and value of the QLAC cease to be counted as part of the IRA balance for purposes of computing the IRA's annual RMD, beginning the year after the year of the purchase.

Suki Example: Suki is turning age 70 1/2 and age 71 in 2015. She plans to keep working (and therefore expects to continue to be in a high tax bracket) for at least another five years. Her projections show she will have a comfortable income even after retirement, though if she lives to a very old age, it could become questionable. She finds a QLAC that will pay her a good income starting at age 85, in about 15 years. She buys it inside her IRA for $125,000. By removing $125,000 from her account value "base" in 2015, this move will reduce her next year's IRA RMD (i.e., 2016) by $4,883, saving her about $1,900 of income taxes that year. Equivalent savings will accrue each year thereafter until the QLAC starts paying out. If the contract makes sense for her, the tax savings is a nice little bonus. Of course her income (and taxes) will go up when she reaches age 85 and starts collecting on the QLAC, but she won't be working then (she figures), so she won't mind the taxable income as much. 

You can also buy a QLAC in your IRA earlier or later than the year you reach age 70 1/2. The earlier you buy it, the longer your $125,000 investment has to accumulate and thus reduce your RMDs pre-age 85 by an even larger amount. The longer you wait to buy it, the less of a good deal it is and the less value it has for reducing RMDs. 

Take the RMD This Year or Next Year?Since you have a choice, which is better? Take the age 70 1/2 year RMD in the age 70 1/2 year? Or postpone it until the age 71 1/2 year? Despite a magazine article that said "never postpone the first year's RMD!" this is actually something that needs to be decided on a case-by-case basis. 

In a few cases, the choice will be easy. 

Don't postpone the first year's RMD if…Someone who needs the age 70 1/2 year distribution to pay immediate living expenses will obviously not postpone. A person who is in a more or less steady income tax bracket, but whose RMDs are large enough that bunching two of them into one year would push him into a higher bracket in the age 71 1/2 year, should presumably not postpone. Postponement will not be possible if the participant desires to do a rollover or conversion from the plan in 2015: The RMD must be distributed before the account can distribute money for a rollover or conversion. 

Do postpone the first year's RMD if… Someone is still working and earning a high income, but plans to retire later in the age 70 1/2 year, so expects to have a substantially lower income next year. Someone who is leaving his entire IRA to charity will probably postpone, since if he happens to die before taking the RMD that is just a little more money that will go the charity at his death income tax-free. Anyone who wants to maximize the amount of the IRA that will pass to her beneficiaries upon death should postpone taking the RMD as long as possible, in case he or she dies prior to the postponed distribution deadline. 

The close cases…For others, the choice is not so easy. A client who expects to be in the same bracket next year as this year might decide based on personal preference: "Jack" takes his RMD early in his age 70 1/2 year, to "get it over with." His sister "Jill" postpones because, even though it looks like her bracket will be just as high next year as it is this year, you never know--she might get lucky and be really poor next year after all, making postponement profitable. 

The person who thinks that postponing is always a good idea because you defer the taxes a little longer should remember that postponing actually increases the amount of the second year's RMD … because the age 70 1/2 year RMD that you did not take in the age 70 1/2 year is still part of the account balance at the end of the year! 

One thing is sure: Postponing the RMD to the age 71 1/2 year creates complications. If the first year's RMD is postponed, two RMDs are required in the second year, and the two RMDs in the second year will have different deadlines, be based on different account balances, and use different divisors! 

Bernie Example: Bernie turns age 70 1/2 in 2015, so 2015 is the first distribution year for his IRA. To calculate the 2015 RMD, he uses the 2014 year-end account balance and the Uniform Lifetime Table divisor for the age he attains on his 2015 birthday, which will be 70 if he was born before July 1, or 71 if he was born after June 30. He can take the 2015 RMD at any time from Jan. 1, 2015, through April 1, 2016. There will then beanother RMD for the year 2016, which must be taken between Jan. 1, 2016, and Dec. 31, 2016. The 2016 RMD will be based on the Dec. 31, 2015, account balance and will use the Uniform Lifetime Table factor applicable for the age he attains on his 2016 birthday. 

Resources: See Natalie Choate's book Life and Death Planning for Retirement Benefits(7th ed. 2011) for full details on the required beginning date and the first distribution year. The book is available as a paperbound "real" book at http://www.ataxplan.com/ or in an electronic (online) edition by subscription athttp://www.retirementbenefitsplanning.com/.