If you're a married couple where both spouses are 65, there is now a 50% chance one will live to 92% and there's a 25% chance that one will make it to 97%. So as we look at how Social Security works and with 10-year treasuries, if you look at interest rates in the US here paying barely over 1% now, that guaranteed 8% increase for each year that you delay your Social Security payments for life. It's hard to beat if you look at the time value of money and you expect to live out into your 90s. Welcome to Keen on Retirement.
I show dedicated to helping you thrive before and during your retirement years. If you are looking to grow and protect your wealth and want to make the second half of your life the best half, then listen in as well as advisor Bill Keen and his host sort through the key issues that you need to know in a lively and candid way. Hello everybody and welcome back to Keen on Retirement. I'm your co-host Steve Sandusky and with me today we've got Mr.
Bill Keen and Mr. Matt Wilson. Hey guys. Hey Steve, good to be back on the program with you, Keen today.
Matt, thank you once again for stepping into the studio with us. We always appreciate having you here with us today. Well thank you. I'm glad to be here.
Well great. Well we've got the brain trust going here. What we like to do is we're going to answer some listener questions. So Bill and Matt, you guys obviously, you're meeting with clients all the time and getting lots of questions that are coming up.
And so every so often we like to do an episode where we share some of the questions that seem to be on the minds of our listeners and of your clients. So why don't we jump into that and let's start with the first question. The first one was around saving in retirement. When we're asking clients to really get clear on their budgeting in retirement, we see the line item quite often of saving.
One of the things that we see folks doing is wanting to accelerate money out of their retirement accounts, triggering attacks to build up money into a bank account. And there's a psychological aspect that could make sense to that. And we always recommend folks have enough money set aside in the bank account where they know they can get to it and they don't have to call us or anyone to get access to that capital. Most of the time it's more about rethinking that and just knowing that those funds are available if needed from the IRA accounts.
The other thing that we're seeing a lot of questions on now is how to claim Social Security. There's been so much banter about the different nuances of Social Security and we wanted to just take a moment and go over those here on our episode today. One is delaying filing. So one of the greatest risks that we see to retirement income is living longer than anticipated.
And you hate to say that's a risk, don't you, Steve? I'd like to live longer, wouldn't you? Well, as long as I can be healthy longer. That's right.
There's definitely a caveat there. Now, if you're a married couple where both spouses are 65, there is now a 50% chance. One will live to 92 and there's a 25% chance that one will make it to 97. So as we look at how Social Security works and with 10-year treasuries, if you look at interest rates in the US here paying barely over 1% now, that guaranteed 8% increase for each year that you delay your Social Security payments for life, it's hard to beat if you look at the time value of money and you expect to live out into your 90s.
In the planning process, we go through all the Social Security strategies and look and compare and make educated decisions. One of the other strategies that you might know about that we talked briefly about but really deserves attention is that last year Congress did away with the popular File and Suspense Strategy. That's right. Congress got rid of the File and Suspense Strategy, but they still grandfathered folks into the restricted application.
If you were 62 years or older as of January 1, 2016, then you can still qualify for this. You go down to the Social Security Administration when you turn 66, you're full retirement age. So it could be 66 and some months depending on your birth year and you tell them, I'm going to restrict my application to only the spousal benefit. And the reason that you would do that is because then your benefit is not impacted at all and that would continue to grow in a crude to a higher amount up to age 70.
But there is one caveat that Congress did factor in, which changed this a little bit, was your spouse has to be already claiming Social Security for you to do that. Prior to the Congress, we'll change this last year. That was not the case. They could do their violence to spend and then you could do their restricted application.
Now that spouse has to be receiving a check on Social Security for you to apply for the restricted application. The other thing that has come up quite a bit in the practice with relating to Social Security is the survivor benefits. Yeah, with longer life expectancy as a survivor benefit, it doesn't give as much attention as it should. The surviving spouse gets the higher of the two benefits.
And so if you've delayed your benefit and you've maximized it, let's say you waited to age 70 and you got the maximum amount, which in some cases that's nearly $40,000 in today's dollars for someone to claim for Social Security, that would be then their surviving spouse's amount. Now theirs would go away. So whatever they were receiving would stop, but then they would get the higher benefit. And so in essence, you're locking in a nice benefit for your spouse.
There's another one out there that folks have been asking about a couple of times here recently. We had a client who was looking to buy a house and needed what I would call bridge funding. And basically what that means is just a short term loan. They have a house they're trying to sell, but they're getting ready to make an offer on the house that they would like to buy.
And they needed the down payment for the new house. One of the places that you could go to is for your IRA account. As long as you get it back within 60 days, it was as if it never happened. Tax-wise.
What it does though is set you up for a big problem. If it goes over into day 61, it could trigger the taxes. And if you're not 59 and a half, it could trigger penalties as well. So we don't necessarily recommend this strategy because anytime you open yourself up with a time frame like that, it creates a potential problem.
But the IRS just came out recently and they've given us 10 reasons that they will allow you to not have to pay the penalty. And I was going to read you the reasons real quick, Steve, you're an example of these might apply to you if you take a distribution. So I want you to be aware of these, okay? Okay.
So I'm going to be a clarifying question here. If I have an IRA and I want to pull out $100,000 for the short term loans, say I need it for 45 days, are you saying I can pull $100,000 out of my IRA, use it for whatever I want for 45, well, actually up to 60 days. And then do I put it back into the same IRA? So is that one question?
And then the second is you were talking about if I'm in a 401K, for example, and I pull out my money from the 401K and I want to roll it into an IRA, in that case, I still have that 60 day window to move it from the 401K to the IRA. So are we talking two different things here? They're two different things on a high level, but really they're not. It's about taking money out of a qualified plan and whether that's an IRA or a 401K.
And if you take constructive receipt of that money, meaning that you can cash the check, right, I mean, I had your name on it, you could cash the check, then you now have 60 days to get that back into another qualified plan somewhere. It doesn't have to be the same one. But it could be the same one. It could be.
Yes. So I can get like a short term 60 day loan from my IRA or my 401K and put it right back in within 60 days. Yeah. And so on the 401Ks, if you're still employed, now we're taking it down another road, it's a 401K loan in that case.
Well, we'll say that for another episode. Okay. That's right. But knowing that there's a pool of money there, most financial institutions will not loan money against an IRA because it's pre-tax money.
I think we ran across one we heard about. I don't have any personal experience with it. Did we run across one man? Yeah, I've seen advertisements for a bank, you know, a local bank here in Kansas City that would do loans against an IRA.
I'm not sure how it's structured, but they advertise it. So the reason why most institutions wouldn't use an IRA is collateral is because it's not really the collateral. It's going to be taxes with all that IRA. When it comes out, I haven't seen a lot of active loans being offered against IRA accounts as collateral.
But the 60 day thing gives folks a little bit of flexibility. The problem though is if you don't get it back, you have to pay the piper and you can be taxes and the potential penalty. But now however, you know, our last episode, we talked about the IRS scams now. It wasn't really the IRS pulling this game.
We'll talk about the IRS today. It used to be if you had a real reason that you missed the 60 day rollovers such as a death or a disaster of some kind, that you could submit a private letter ruling to the IRS. It costs about $10,000 and it's a log of time waiting for their determination. But now what they're saying is a little bit of relief here that if you missed the deadline, they're going to allow you to self-certify that the reason for the oversight is excusable.
As long as it applies to one of these things are applicable. So here they are. One, the financial institution receiving the contribution or making the distribution was in error. So if it's their fault, the financial institution, two, the distribution was made as a check that was actually misplaced and never cashed.
The distribution was deposited into and retained in an account that the taxpayer mistakenly bought was an eligible retirement plan. The next one, the Tax Players Principal Residence was severely damaged. The member of the Taxpayers Family died. The Taxpayer or a member of the Taxpayers Family was seriously ill.
Restrictions were imposed by a foreign country. I'm not sure exactly what that means. A postal error occurred. That never happened.
That's right. The distribution was levied and returned to the Taxpayer after the rollover deadline. And the party making the distribution did not provide timely information that was required by the receiving plan or I ready to complete the rollover. So a couple of those kind of are all pointing back to the institutions involved making a mistake.
And finally, Steve, you will get relief if you were incarcerated over that 60 day period. No. We were trying to figure this one out. I guess if you take a rollover check and then in that 60 day period, something happened, I guess, and you had to go away for a bit.
They would have some lenience on you when you got back and got that deposit. Yeah, a few of those, it sounds like IRS has a soft spot in their heart. The one where they thought they deposited into a qualified plan. I could say a lot of finagling on that one.
Right. They thought they deposited it in the right. Would that be including buying a boat or a new car? I guess.
Yeah. Well, it's nice to see that the IRS is helping us out a little bit because you guys know real well, people do make honest mistakes when it comes to these rollovers and stuff. And so I know in the past, there's been horror stories about people that lost a lot of money because they didn't do this properly, but it wasn't really through their own fault. And a victim of circumstances.
So yeah, it is nice to see that. That's right. We do have some leeway here from the government and they recognize that. That's right.
I do believe that it makes a lot of sense. We have a file of pride lettering with the IRS. It would just be onerous for an individual to follow that through, especially on something they could, like this says, they could self notify and come up with file of form and be set. There's a couple more, and I know we're going through them quickly here, but this is a big one.
There's a lot of fear around it too out there and it's around required minimum distributions. And a lot of folks know that when you hit age 70 and a half, you're required to start taking money out of your IRA account in minimums based on a schedule that the IRS provides. And if you do not take your minimum distribution when you are supposed to, the penalty is 50% of what you should have taken. So that can start to add up pretty quickly.
There's a couple of ways around this now. And Matt, you've gone over it several times with folks here recently. Luckily, the way our firm operates is we make sure folks get their minimum distributions. We talk about checklists during the processes here.
This is one that's kind of at the top of the list for folks that are over 70 with us. Yeah. And you know what's interesting too? So we talk about the penalty being 50%.
Now, let's say you realize that it's been several years that you forgot or maybe it was a parent of yours that mistakenly forgot. Not only would there be a penalty, there will be interest on that penalty too. Sure. So that number will creep up and it will get much higher than 50% based on what they tell you.
Basically, you take it or they take it. That's right. If you happen to miss an RMD, there's a process to possibly get out of the 50% penalty. And the first step is just to admit your mistake, you make that distribution.
So you get with your custodian and you have that distribution and you have that file. And then along with that, there is a tax form, tax form 5329. That form is called additional taxes on qualified plans. And you'll file that for each year that you missed your requirement of distribution.
And essentially what you're requesting with that tax form is a deferral or a waiver of that 50% penalty. Along with that form, it is recommended that you write up a letter and explain what happened. And again, apologizing for what you did as soon as you realized that you missed your requirement of distribution that you took the distribution. And you can lay out the reason for it as to whether it was a distant oversight or it was a custodial error or whatever it was.
Almost like this other one we talked about. Yes. There's no promise that the IRS will waive it. But if you basically can prove that it was a reasonable error, so that is what the IRS is going to look at.
And if they do waive it, they will give you a letter explaining that they did waive it. And of course you would save that letter. That is recommended to keep that with your tax form in case anyone comes back or they come back in the future and not realize it. So there's no guarantee that they will get out of it.
But it is within other professionals that we work with and especially tax professionals that have had this happen with some of their clients in the past. They have said it's generally expected that the IRS will waive one of them if you had it happen that they would waive that. It's not to be taken for granted though, is it? Both of these things today we're talking about.
It seems like the IRS is doing things that make sense and that are reasonable for people as long as it's not abused. And I think the end of it. And that's right. It's complicated.
So they are giving some folks some leeway a little bit. That's right. Steve, we bring good news today with respect to the IRS. How's that for you?
That's good. Very good. Yeah. But you don't always think of the IRS as the bearers of good news.
That's right. The bearers of kind of good news. Yeah, I guess it's definitely not the bad news. Yeah, at least they have some sympathy if you make honest mistake here.
Yeah. Good. So that's two 403 B's and inherited IRAs from his mother and his father. What is the minimum number of accounts from which Mike must take a distribution in order to avoid a penalty?
Now here it's multiple choice. So I'll give you those. Did you get all that, Steve? Yeah, I did.
I did. And I've got my answer. Okay. Okay.
So let me just restate. Yes, sir. Yep. So we've got Mike.
He's 73. So he's farming over the 70 and a half. He's got two IRAs. I'm assuming those are his name.
Those are in his name. He's got two 401 case. Yep. So he's got two, four, three B's.
Are they at different X employers as well? That's correct. Boy, he might jump around a lot. He's got like these millennials.
He did say something about him. So he's inherited an IRA from his mother and inherited one from his father. That's correct. What IRAs for Mike?
All right. And tell me the question once again. Okay. So the question is what is the minimum number of accounts from which Mike must take a distribution in order to avoid a penalty?
Okay. Do you want to go first, Bill? Yes. I'm going to say seven.
The reason why I say that is I think he can combine his IRAs, take it from one of those. You do have to take it separately from each 401k. You have to take it separately from each inherited IRA. And I believe you have to take it separately from each 403b as well.
Well, I'm going to say, and Matt, didn't you say this was going to be multiple choice? There is a multiple choice. So do you want me to get one? Yeah.
What are our choices? Okay. A is eight. B is four.
C is one and D is six and E is seven. Okay. So, okay. Seven.
Yeah. I thought that was going to be another. I was like in trouble. So anyway, I'm going to go with C.
He's going to be separately from each account that is subject to an RMD. But I think you can pull it all from one account. Okay. Are those your final answers?
Yeah. That's my final answer. I'm knocking these live line. Okay.
You're scribbling down. I'm writing down. Well, we're here live. So, I'm trying to get this right.
People expect me to know this. Yeah. So, here the answer is D six and it was selected by less than 18% of the survey respondents. And here's why.
The most common one was C, number one, what you chose Steve, but six is the answer. And it is because what Mr. Keene said, you can aggregate your IRAs. So there's only one on the two IRAs.
Each 401k must have its own required distribution. So there's three total. Now, this rule, this is an obscure rule that many people don't know about, is 403b's can be aggregated. Oh, OK.
So you only have to take one out of both the four 3b accounts. So now we're at four and then one from each inherited IRA. So there is your six. So Steve, we talked about this in the past.
I think we're going to have to roll it out at this time. Based on this question in your and my answers, we have this in effect. Ooh. Yes.
We missed out. I didn't know that. Yeah, that's right. It is obscure.
All right. So I think the lesson here is that if you have these accounts scattered about, you either need to be doing some really close tracking on these things or you need to get things consolidated, don't you? That's right. And to your point, your answer with seven, yes, you lean to just taking them from each one, you will always have that covered versus trying to aggregate it.
So if you didn't know, you are better off just taking them from each account. It sounds like a lot of work. It is a lot of work. And as you get older and you have a lot of custodians on moving parts and things maybe go paperless, it's easy to get the stuff confused and miss one of these things, which I believe is why the IRS does provide some...
The leading thing. Once or so. One other thing that I think we should try to cover today and that's with respect to the Medicare premiums, we see this coming up a lot with retired folks who are new to Medicare and their premiums are being calculated based on an income that they had for what was it two years prior? Right.
For example, this year, 2016, you retired this year and you're over 65, so you're going to sign up for Medicare. They are going to base the premium that they charge you on your 2014 tax return. The reason they say they do that is that's the most recent data that they have when it comes to your income. Most people don't realize that the more money you make in retirement, the more you pay for your Medicare premium.
So I think it's 120 or so now is the minimum you can pay. That's correct. $120 a month per person. Folks from last year that were under the whole harmless provision because no- The brand fathered into the 105.
Yeah, 105. But then the most of the individual can pay somewhere close to $500. It is. It's a multiple of that.
Did you know that Steve, that Medicare premiums were based on income? I did not. Yeah. Yeah.
So as your income goes up in retirement, you will pay more on your Medicare premium. Now this is what most people don't know about. They have a life-changing event circumstance to reduce that premium. We had a client just recently go through this.
They retired halfway through the year. They got the letter from Social Security referencing their premium and it said based on your 2014 income, your premium is going to be increased over and above the $120 a month. And the first tier is an additional $50 roughly. And he was a single gentleman.
He was going to pay $170 a month for his Medicare premium. But with this life-changing event form, he can go down to the Social Security Administration and said he has retired. Essentially, his work has ceased and his income in 2016 will be less than the thresholds that require an increased premium. And given that information, they will reduce his premium to the lowest amount.
To what he stated, basically, it will be correctly. He has to state that. It's not that they'll fix that once his income comes in. But he will state that his income is lower than the threshold.
Now if it's not going to be lower than the threshold, he needs to verify that too and say it's going to be within whatever tier it's going to be in. They will ask that question. And they'll figure it out eventually. They will.
And they'll back charge it for it. The issue here is we see people coming in who are paying the higher premiums based on what their income was when they were still working two years prior. And they think that they're stuck paying the higher premiums until that rolls off. This one piece of paper that Matt mentioned and going down and letting them know about that can reduce the Medicare premiums to what they should be.
That's right. So in the terminology, if you're going to go down there and do that, you want to ask for a new initial determination. So when you have a life-changing event and now you want to ask for a new initial determination and then they'll go through the steps to calculate that and ask you the questions they need to verify what that is going to look like for you. Very good.
Boy, just goes to show the stuff can get complicated. There's so many combinations and permutations here that it really takes an expert to understand all these nuances and to use them to the advantage of our consumers and investors. That's why you see us spending a lot of time on these things and talking about having a checklist driven process so that you're not trying to remember all these things yourself. We have a nice checklist and it's broken down into areas where you can just walk through it and check the boxes and say, just apply it, just apply it, just apply it.
And we just know that we haven't missed anything. It's very important. Great. Well, guys, I think this is a good way to wrap up this episode.
So as always, Bill, Matt, thanks. You guys are giving us some great info, some great advice here. We appreciate that. And we'll look forward to catching up on the next episode.
Very good. Thank you, Steve. Thank you, Matt. The opinions expressed in this podcast are for general informational purposes only and are not intended to provide specific advice or recommendations for any individual or on any specific security.
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