Policy Update – Social Security Benefits

Policy Update – Social Security Benefits

Recently Congress announced that it is making changes to the Social Security filing strategies that many couples have used for years to add thousands of dollars to their retirement incomes. Before you read any further, please note that if you are already receiving Social Security benefits based on your own record, or by using one of the strategies that will soon go away, your benefits will not change or be interrupted by the legislation.

The legislation in question, the Bipartisan Budget Bill 2015, was passed by the Senate last week and will likely become law once signed by the President.  The two strategies under fire – known as file-and-suspend and a restricted application for spousal benefits – have made it possible for couples to delay claiming Social Security benefits based on his or her own earning record, each taking advantage of their eventual benefit growing by 8% per year for each year deferred, while one spouse can claim ½ of the other spouse’s benefit until switching to their own (often age 70). To do this, typically the higher earner files for benefits and suspends them, while the other files a restricted application for spousal benefits.

Here’s what you should know:

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IRS “Throws in the Towel” on 401(k) Roth Conversions

For years the IRS held strong: When rolling over 401(k) funds, after-tax and pre-tax funds are distributed pro-rata. However, with the recent issuance of IRS Notice 2014-54, the rules have changed.

Historically, for those who maxed out their tax-deferred growth options, saving money in an after-tax 401(k) plan was not a great strategy. The IRS’ stance on pro-rata distributions made it impossible to convert after-tax funds in a 401(k) to a Roth IRA and pre-tax funds to a traditional IRA in tax-free transactions. Now, the IRS has reversed its prior position and taxpayers who wish to roll over their 401(k) funds may allocate the after-tax portion to a Roth IRA.

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Saving ≥ Investing

It’s always a version of the same question:  “How much do I need to have saved in order to retire?”  As planners, we are able to run calculations ad nauseam of amounts currently saved, future savings and annual return assumptions to project retirement needs.

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The Retirement Gamble

The Retirement Gamble

Over the past week, I have had several clients mention the recent PBS Frontline special, “The Retirement Gamble” (Retirement Gamble). I have also read several negative comments from my industry regarding the piece. After finally finding the time to watch it this morning, I believe it was honest and well done. It is refreshing to see PBS do a piece  that includes two of the three messages we try to relay to investors every day.

  1. A Fiduciary places investors interest before their own
  2. Fees steal returns and are one of the most important determinants in investment outcomes

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