Social Security Earnings

Never Too Old

 

Many people continue to work and get paid past their normal retirement age. No matter how young or old people are, Social Security adds those earnings to their lifetime earnings record. In turn, this 35-year earnings record is used in determining their retirement benefits. If one has worked for less than 35 years, zeros are added into the formula for years not worked. If one has worked more than 35 years, the lower earning years (adjusted for inflation) are dropped from the formula. A surprisingly large number of people are affected by this and should review their benefits. We know of child singers and teenage actors who have substantial earnings. We also have met many people in their 70s or 80s who continue to work and are well paid. Some women initially retired with a spousal benefit but continued to work. At some point, the woman’s own benefit could eclipse the spousal benefit, which is at most half as large as the primary wage earners’. In the case of a divorcee, it may be a little difficult to check, but it may be worth doing. With the help of the Social Security administration, a review of your benefits is always available.

Tax Planning

More Than An Afterthought

In the last minute rush to finish their taxes, many people throw in an IRA contribution without much thought. Tax planning in general and IRAs in particular deserve more care and attention. In growing our assets and preparing for retirement, we have four major levers: increasing income, spending less, improving investment results and minimizing taxes. IRAs can be useful in two of those four categories. Since the huge bear market, it is generally advisable for most people nearing retirement age to try to increase their savings. Correctly using the best retirement vehicles is one of the easiest steps to do this. Choosing which types of accounts to use is important and varies with each person’s needs. For starters, using a Traditional IRA provides a front end tax deduction for those eligible. Establishing a Roth IRA doesn’t provide the initial deduction, but in most circumstances earnings from the Roth come out tax free.  Traditional IRA distributions are taxed at the ordinary income tax rate.  Further, Roths don’t have a required minimum distribution after age 70 ½ as do Traditional IRAs. Getting these choices right and not running afoul of the complex rules can make a huge difference in how much money you accumulate.

Gift Taxes

 A Congress Bearing Unusual Gifts

For those inclined to be generous, Congress made it a lot easier last year. As part of the tax cut extension, Congress increased the estate tax exemption as well as increasing the gift tax exclusion. It is now possible for an individual to give $5 million without a gift tax. Each spouse could separately gift $5 million or for a couple, acting together, $10 million. The individual annual gift limit remains at $13,000. The extension is good for two years. No one knows what will happen afterwards. The $5 million figure could stay, it could revert to the previous $1 million or it could be any other number. Although anyone who watches Congress closely soon learns that it is difficult to predict Congressional actions, most observers believe that Congress won’t make retroactive changes to the tax law during this two year period. For wealthy individuals who are in a position to take advantage of the higher gift tax exclusion, the next two years may prove to be a uniquely favorable period.  Many possibilities have been opened up by these tax law changes and the window of opportunity could shut as quickly as it opened.