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Whadda Ya Mean?
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Tomorrow I will be able to accomplish one of my goals with this business.  Cathy and I will attend the USAF Charity Ball representing C.L. Sheldon & Company.  It is my first opportunity to use money from this business to support a worthwhile charity.  It is my goal to be able to do this more in the future.  Just thought you might want to know...
 
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Financial Strategies
Planning Techniques, Procedures and Guidance for Military Professionals
Greetings!

O.K.  It is 11 days until 15 Apr and I've got a few tax returns on the desk...I'm going to be brief.  This issue has a heavy retirement slant.

My first article discusses Non-Qualified Retirement Plans which may become an option for some of you in the future.  Understanding the basics isn't too hard but the details can be very tricky.

The second article talks about what happens to inherited retirement plans.  And by the way, if you have TSP make sure you understand what happens with Survivor's Account when the survivor dies.

My quick comment mentions something I've noticed in my tax practice.  Incorrect depreciation with regards to rental properties.

Finally, the articles from Financial Presses cover tax strategies for this year (it is really too late to do much for 2013).  Finally I hit retirement accounts one more time with an article that talks about passing your IRA on to your grandchildren.

Enjoy April.  I think we may actually be done with snow in the National Capital Region.

Curt
Curtis L. Sheldon, CFP, EA, AIF
C.L. Sheldon & Company, LLC
(703) 542-4000 or (800) 928-1820
Whadda Ya Mean It's Not Qualified!?

When I speak at ETAPs I spend quite a bit of time talking about Qualified Retirement Plans.  I mention Non-Qualified Plans and then say that most retiring Senior Military Officers won't immediately start with a Non-Qualified Plan.  Well...some of you may get offered a Non-Qualified Plan offered to you in the future.  So let's take a look.  I talk a little bit about what makes a plan non-qualified and a basic Non-Qualified Plan known as Deferred Compensation.

 

What Makes a Plan Non-Qualified.

 

Basically, a plan is non-qualified if it doesn't meet the criteria to be qualified.  In effect, this allows the employer more flexibility.  For instance...

  • Discrimination.  Non-Qualified Plans can discriminate in favor of Highly Compensated Employees (HCE)
  • Vesting.  Non-Qualified Plans don't need to vest.  In fact, they generally don't.
  • Contribution Limits.  Non-Qualified Plans can have higher contribution amounts/limits than Qualified Plans

Some other key components of Non-Qualified Plans include

  • Funds at Risk.  Funds in a Non-Qualified Plan must be at risk.  For example, the funds could be a general liability of the employer and as such are only an accounting entry on the company's books.  Or, there may be some requirement to stay with the company for a certain amount of time to be eligible for the funds.
  • Tax Treatment.  Contributions to a Non-Qualified Plan are not tax deductible to the employer or taxable to the employee until the employee becomes eligible for the funds (not when withdrawn).  This is known as constructive receipt.

Deferred Compensation Plans

 

In a Deferred Compensation Plan the employee defers some income to be paid at some point in the future.  This is much the same as a 401(k) plan. 

 

The difference between a 401(k) plan and a Deferred Compensation Plan is that in a 401(k) the funds go to a trustee and are held for the benefit of the employee.  The funds vest immediately (matching funds may not vest immediately). 

 

In a Deferred Compensation Plan the deferred salary becomes a liability on the employer's books.  If the company goes out of business, the employee is treated just like every other creditor (Funds at Risk).

 

Most Deferred Compensation Plans pay investment income in the form of interest.  For building a portfolio, you might want to consider a Deferred Compensation Plans as fixed income when assigning to an asset class.

 

The employee will not pay income tax on the pay deferred and the employer will not get to deduct it.  When the funds are no longer at risk they become taxable to the employee and tax deductible to the employer.

 

This is a very top-level look at Non-Qualified Plans.  The Deferred Compensation plan is the most simple.  In my opinion this is an area where you do not want to "go it alone". 

Curt's Quick Comment
Do you own rental real estate?  Do you know you don't really have the option to depreciate it or not?  When you sell rental real estate you will owe taxes on depreciation recapture.  Depreciation recapture is based on the amount of depreciation that was taken or should have been taken.
Options for Assets Inherited From an Employer Sponsored Plan

 

If you recently inherited retirement assets from a deceased loved one, it is important to pay attention to IRS rules that govern this type of bequest. Your options in managing this money typically depend on your relationship to the deceased and whether he or she had already begun taking required minimum distributions (RMDs) upon reaching age 70.

 

Considerations for Spouses

 

Spouses have three options when it comes to inheriting assets from a qualified defined contribution retirement plan:

  • Keep it in the plan.

  • Take the assets as a lump sum.

  • Transfer the assets into their own IRA.

 

As long as your spouse's plan permits, you may keep the assets in the plan as a "beneficiary account" and continue to enjoy its tax-deferred status. If your spouse had already begun taking RMDs, you must continue to take them at least at the same rate. If your spouse had not yet begun taking RMDs, you can delay taking them until the year your spouse would have turned age 70.

 

If you take a lump-sum distribution, you will be required to pay income taxes on the full amount. Twenty percent of the amount due to you will be withheld automatically.

 

If you transfer the assets into an IRA, you are not required to pay federal estate or income taxes if the assets are left intact within the estate. After reaching age 70, you must begin RMDs based on your life expectancy. If you have already begun taking RMDs, you must take your distribution for the year before transferring the assets into your account.

 

Considerations for Non-spouses

 

Non-spouses also have three options:

  • Keep it in the plan.

  • Take the assets as a lump sum.

  • Roll over the assets into an inherited IRA.

 

Your option to keep it in the plan is dependent on plan guidelines: Some will allow you to keep the account in the plan; some will require you to withdraw the assets. If the deceased had already begun taking RMDs, you must continue taking them at the same rate or faster. If the deceased had not yet begun taking RMDs, you must begin taking distributions by the end of the year after the person died.

 

As with the spousal scenario, taking a lump-sum distribution will necessitate the payment of income taxes on the full amount. Twenty percent of the amount due to you will be withheld automatically.

 

If you are opening an inherited IRA, the account must be held in the name of the original participant, with you listed as the beneficiary. You will be taxed on your distributions as you take them.

 

Considerations for Trusts

 

For estate planning reasons, sometimes the deceased designated a trust, not an individual, as the beneficiary. Often it is assumed without detailed analysis that because the beneficiary was a trust, the money must be withdrawn immediately. However, each trust document is different. In certain situations, you may be able to treat the inherited account as though you were the named beneficiary. In other situations, you may have no choice but to close the account immediately. Before you act, you should have a professional specializing in this area review the trust document and help you understand your options.

 

Because determining the tax status of inherited retirement assets can be complicated, you may want to consult an estate planning attorney, tax professional, or a financial advisor to answer any questions you may have.

 

Required Attribution

Because of the possibility of human or mechanical error by Wealth Management Systems Inc. or its sources, neither Wealth Management Systems Inc. nor its sources guarantees the accuracy, adequacy, completeness or availability of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. In no event shall Wealth Management Systems Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

 

2014 Wealth Management Systems Inc. All rights reserved. 

From the Financial Presses

 

14 Sure-Fire Midyear Tax Planning Moves In '14

Even as we approach the midpoint of this year, it's still not clear whether some favorable tax provisions that officially expired last year will be extended retroactively into 2014. Yet while that uncertainty could affect your tax planning for this year, there's plenty we do know that you could act upon. Consider these 14 midyear tax strategies for '14 (Read more Here)

 

How Best To Leave IRAs To Your Grandchildren

Would you like to set aside money for your young grandchildren? One way to do that without giving up control over the assets is to leave one or more of your IRAs to the grandkids. If you handle things correctly, the youngsters have to take only minimal distributions during their lifetimes, enabling the funds to grow and compound for decades.  Complete article Here 

  
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by C.L. Sheldon & Company, LLC ), or any non-investment related content, made reference to directly or indirectly in this newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this newsletter serves as the receipt of, or as a substitute for, personalized investment advice from C.L. Sheldon & Company, LLC . To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. C.L. Sheldon & Company, LLC is neither a law firm nor a certified public accounting firm and no portion of the newsletter content should be construed as legal or accounting advice. A copy of the C.L. Sheldon & Company, LLC 's current written disclosure statement discussing our advisory services and fees is available for review upon request.
 
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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this communication (or in any attachment) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed in this communication (or in any attachment).
Military Professionals have unique financial benefits and unique financial needs.  If you think you would like some help developing your Financial Strategy please give us a call at (703) 542-4000 for a free initial consultation or for more information go to our website at .www.CLSheldon.com .