Taxation of Social Security Benefits

 

By Glenn J. Downing, MBA, CFP®

This blog post is the second of a trilogy having to do with Social Security.  The first is about Social Security Benefits; the third is, Will Social Security will be There When I Retire?  

Oh yes. Many new Social Security retirees get a big surprise when they learn about the taxation of Social Security benefits. This started during the Clinton administration. That administration added a formula to the tax code to determine how much, if any, of your Social Security benefit is subject to tax. Previously Social Security benefits did not count as taxable income at all.

Provisional Income

The formula used to determine how much of your benefit is taxable is the provisional income formula. It boils down to this: add all of your income together – wages, business earnings, tax-free bond income (yes – non-taxable income is included in this formula), IRA distributions – everything – plus ½ of your Social Security...

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The Thrift Savings Plan for Federal Employees

 

by Jonathan G. Cameron, CFP®

The Thrift Savings Plan, or TSP, is the equivalent of the 401k for federal government employees. My intention here is to cover the main highlights of this fantastic retirement benefit. Much more detail is found on the TSP website.

As in a 401k, you contribute pre-tax money into a Thrift Savings Plan. Earnings in the account are tax-deferred. You are taxed only when you withdraw funds in retirement. If you work long enough, consistently contribute to your plan, and invest appropriately, you can potentially retire comfortably.

Thrift Savings Plan: Military and Non-Military Accounts

This post is for non-military TSP retirement participants. The TSP offered to those in the military is different. Elsewhere I discuss the benefits of a Thrift Savings Plan retirement account as a High-3 and as a BRS (blended retirement system) participant.

FERS – the Federal Employment Retirement System

If you are a federal civilian employee and began employment after...

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What Happens When My Mother Runs Out of Money?

By Glenn J. Downing, MBA, CFP®

Increasingly as we work with people of retirement age, we’re hearing a new concern: What happens when my mother runs out of money? This is something relatively new. Those in their middle ages used to be called the sandwich generation, because they were in the middle, caring for both their children and their parents. But this is something new . . . we’re speaking of people in their 60’s and 70’s caring for parents in their 80’s and 90’s.

By the time we hit our latter 60’s, most of us hope that the retirement nest egg is firmly in place, children are married off, and grandchildren are a joy. But since we’re all living so much longer, caring for one’s very elderly parents is now a large financial planning topic.

Medical Issues are a Primary Cause for Concern

Too often we see a client who is concerned about his parents outliving their assets. A parent with a long and debilitating illness is a common...

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Asset Bubbles

By Glenn J. Downing, CFP®

(Note to the reader:  I originally posted this piece in mid-March of 2020.  Now I'm reviewing it at the end of April 2020.  Hit the nail on the head, didn't I?)

I’m sure you’ve heard the term before:  asset bubble.  Sounds ominous, because a bubble is generally something that’s going to pop.  On the other hand, I think of bubbles with champagne.  So there are two images, both conjuring up a party that has to end at some time. 

What does the term refer to in terms of market valuations?  It means simply that at some point assets will be trading at a price that’s too high, and that the price will come down – maybe gradually, or maybe by a pop.  Why is there so much in the financial literature today about asset bubbles?  Because there appears to be a big asset bubble in the making.

Correction vs. Recession

Before I go on, let me define two terms: 

  • A market correction...
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Don’t Get Distracted by Financial Headlines – Stick to Your Financial Plan

by Jonathan G. Cameron, CFP®

We’ve all seen the financial headlines:

“Sell everything and buy gold!”

“Time to take profits off the table!”

“The market is poised for a big upswing – get in now!”

“Make 16% guaranteed with tax lien certificates!”

“Buy my real estate flipping system and control your own rental empire!”

…I’m getting an Excedrin headache.

The Trap of Financial Headlines

If you’re like many people, reading the financial headlines every day can make you crazy. Yet you continue to watch in order to stay informed. You want to be in the know about financial markets so you follow CNBC, Money Magazine, The Wall Street Journal, The New York Times, and others. Some outlets are better than others. There is so much economic uncertainty in the air, so you invest time and energy reading, or listening, to these “experts” to get a sense of what you need to do with your money.

...
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You Are Generous. Give Creatively.

By Glenn J. Downing, MBA, CFP®

Charitable Giving

As a financial adviser, I am privileged to work with many wonderful people who give generously. These are people who want to leave a legacy. These are clients who want to leave money behind which will continue to accomplish the good works the donor did during his or her lifetime. You may see or hear the names of prominent donors – sponsors of a university building or underwriters of Masterpiece Theatre – and think, Well, yes; I’d love to endow this or that organization or charity, but I’m simply not in that league.

Leave a Legacy

Even if you don’t have a lot of spare cash kicking around, you may still be able to leave a legacy. One of the best ways to do this is with life insurance. For a manageable annual premium, you may be able to leave hundreds of thousands of dollars to your favorite organization. It works like this:

Decide which non-profit you’d like to see flourish.

Typically, this is a...

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The FRS Investment Option

 

By Glenn J. Downing, MBA, CFP®

FRS participants have a choice among two retirement plan options:


The investment option, which is a defined contribution plan (DC)
The pension option, which is a defined benefit plan (DB)
In previous posts, I covered both the FRS Pension Option and the DROP (Deferred Retirement Option Program). In this post, I’m presenting the FRS Investment Option.

The salient feature of any DC plan is the amount of contributions that can go into an individual’s account. On the other hand, with a defined benefit plan (also known as a pension plan) there is a pension formula. The inputs are usually based on years of service and average or final compensation. The formula calculates a pension amount that is guaranteed over the pensioner’s lifetime or lifetimes of the pensioner plus spouse. Here, though, I’m focusing in on the FRS investment option, which is the FRS defined contribution plan.

How Much Money Goes In?

ERISA statues define...

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Required Minimum Distributions

by Glenn J. Downing, MBA, CFP®

All the rules for Required Minimum Distributions (RMDs) changed with the SECURE Act of 2019.  In this piece I hope to distill the changes.  

Important Ages

There are two important ages in retirement financial planning: 59 1/2 and 72. The former marks the age when you can distribute from your retirement account – IRA or 401k – without paying a 10% penalty on the distribution. The IRS, with this penalty, gives us all a reason to keep our long term savings in place for its intended purpose – retirement income.

The second date is now age 72, and this is the age at which you must begin taking your RMDs from your retirement account. This is a change; the date used to be April 1st of the year after the year in which you turn 70 1/2.  More specifically, if you were born anytime after July 1st of 1949, the new law DOES apply to you.  Born any earlier, and you're still on the 70 1/2 schedule. 

As the name...

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Deferred Retirement Option Program (DROP)

 

By Glenn J. Downing, MBA, CFP®

The Deferred Retirement Option Program (DROP) is available to Florida Retirement System (FRS) pension plan participants. As a DROP participant, you earn your salary while your monthly pension is paid into the FRS Trust Fund. You earn interest at the rate of 1.3% on those DROP funds. This money adds up quickly. If your pension payment is $5000/month, your ultimate DROP payment will approximate $310,000!

This is a rich retirement – there’s nothing remotely like it that we’ve see in private industry.

Before you participate in DROP, you earn one month of retirement service credit for each month you work. When you enter DROP, you are considered to be retired and your pension is frozen at that level. You will still benefit from the cost of living increases, however.

Who is Eligible to Join DROP?

To participate in DROP, you must be vested and eligible for normal retirement (based on your years of service or age). You must be an active...

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Social Security Benefits

 

By Glenn J. Downing, MBA, CFP®

This blog post is actually the first of a trilogy having to do with Social Security.  The second is about the Taxation of Social Security Benefits, and the third is, Will Social Security will be There When I Retire?  

The Social Security benefit program is officially called OASDI – Old Age, Survivor, and Disability Insurance.  As the name suggests, it consists of two parts – the disability income part, and the retirement income part.

Funding for Social Security

The program is funded by payroll taxes under the Federal Insurance Contributions Act (FICA):  7.65% of your gross pay, matched by your employer, on your earnings up to $137,700 in 2020.  This means that, on that same amount, your employer withholds $10,534.05 from your pay, and matches that amount equally.  Technically, the social security amount is 6.2% and the Medicare amount is 1.45%, and these total to 7.65%.  If you earn more than...

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