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Penalty! How to Avoid Penalties when Planning for Retirement

Penalty!

Originally aired 05/19/2021

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Whether your favorite team gets flagged on the field or you find yourself with a fine from the IRS, penalties are never fun. On this episode of the Get Ready For The Future Show, we’re bringing the straight talk!

You’ll learn:
– Valuable market insight from LPL’s Chief Market Strategist, Ryan Detrick
– Unnecessary costs to steer clear of with Social Security and Medicare
– Important tools that can help you avoid penalties to and through retirement

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SHOW NOTES

False Start

  • Whether your favorite team has a flag on the field or you find yourself with a fine from the IRS, penalties are never fun. We’re talking all about how you can avoid them on today’s Get Ready For The Future Show!
    • And later, we’re joined by LPL’s Chief Market Strategist Ryan Detrick!
  • Retirement can be confusing!
    • There are so many facets to planning for retirement, and each has its own set of rules and deadlines (and penalties if you make a mistake).
  • Today we’ll go through the deadlines and rules you need to know to avoid penalties and our secret weapon to help you keep it all in order!
  • Social Security
    • The age at which you start to collect Social Security benefits has a big impact on the amount of money you ultimately get from the program.
    • The key age to know is your full retirement age.
      • For people born between 1943 and 1954, full retirement age is 66.
      • It gradually climbs toward 67 if your birthday falls between 1955 and 1959.
      • For those born in 1960 or later, full retirement age is 67.
      • You can collect Social Security as soon as you turn 62, but taking benefits before full retirement age results in a permanent reduction – as much as 25% of your benefit if your full retirement age is 66.
    • Another way you can get dinged for taking Social Security early: The “Social Security earnings test.”
      • Early claimers (under full retirement age) who are still working will forfeit $1 in benefits for every $2 you make over the earnings limit, which is $18,960 for 2021.
    • Now, for some, delaying social security isn’t the best option. It’s important that you discuss with your advisor how this fits into your overall plan.
      • Don’t have one? Now’s the best time to get one.
  • Medicare
    • Medicare late enrollment penalties can catch some people unaware.
    • Medicare Part A, Part B and Part D can have late enrollment penalties for premiums.
    • If you’re already collecting Social Security, either retirement or disability benefits, you will automatically be enrolled in Parts A and B. The Part B premium will be deducted from your monthly Social Security benefit check.
    • If you have to sign up, the first time you can enroll is called your initial enrollment period.
      • This is the time when you should sign up for Parts A and B, also known as Original Medicare.
      • The initial enrollment period normally begins three months before the month you turn 65, includes the month you turn 65, and ends three months after the month you turn 65.
    • If you’re still working and receive coverage from your employer, you can tell Medicare that you’re already covered under an employer-sponsored plan. This will save you from having to pay an enrollment penalty but also not require you to pay the Part B monthly benefit. In general, it’s best to stay on your employer-sponsored plan.
    • Part A: You might see a 10 percent increase if you are required to pay a premium for Part A (if you did not qualify for premium-free Part A) and you did not enroll when you were first eligible. You will pay the higher premium for twice the number of years you weren’t enrolled. If you should have been enrolled two years ago, you have to pay the penalty fee for four years.5 Most people don’t pay for Part A and are automatically enrolled so there’s usually nothing to worry about here.
    • Part B: Be careful with Part B. The penalty is 10 percent for each 12-month period you should have been enrolled. Example: If your initial enrollment period ended July 31, 2015, and you waited until August 2 of 2017 to enroll, your premium will go up 20 percent. And you have to pay the penalty fee plus your normal premium for as long as you have Part B.6
    • Part C: No penalty fee
    • Part D: If you don’t meet one of the four requirements above for a period of 63 days or more in a row, you will face a penalty that requires some complicated math to figure out. The penalty is calculated by multiplying 1% of the “national base beneficiary premium” ($33.06 in 2021) times the number of full, uncovered months you didn’t have Part D or creditable coverage. The monthly premium is rounded to the nearest $.10 and added to your monthly
  • So, what’s the plan?
    • The best defense against unwanted penalties is a robust, personalized financial plan and a trusted advisor to help you on your journey to and through retirement.
    • Click here to get started.

INTERVIEW: Ryan Detrick, Chief Market Strategist at LPL Financial

  • Joining us today, as he often does, is Ryan Detrick, Chief Market Strategist at LPL Financial!
    • Ryan, how are you?
  • We are wrapping up a record-setting earnings season and it appears there isn’t much in the economic outlook to slow equities down…  But there appears to be plenty to be concerned about in terms of stock prices, at least in the near term given the most recent volatility.  What are your thoughts?
  • Inflation concerns are quite evident among investors today.  Do you foresee a spike in inflation, and will it be enough to slow down or choke off the rally?
  • Your team seems to be changing its outlook on international stocks of developed countries.  What is behind the change since you’ve been pretty negative on developed international in the past?
  • The bond market has driving interest rates upward, and a few days ago, Treasury Secretary Janet Yellen said rates may have to go higher in order to slow down the economy.  What does that do for your outlook on interest rates and the overall fixed income market?
  • A few days ago, Arkansas Governor Asa Hutchinson discontinued the “extra” unemployment payments that displaced workers have been getting, saying “We need folks to get back to work.”  In your opinion, has the extra money for unemployment benefits created the shortage of willing workers that we seem to be experiencing?
  • What, if any allocation changes are your teams making in the portfolios you manage, given this stage of the market recovery?
  • Are you seeing any signs of the “Sell in May” influence, or have your efforts to debunk the myth been successful?

Offsides

  • Building the future you dream of can be tough — but the situation can be even more difficult if you run into fines and penalties that could ding your retirement accounts.
  • Excess IRA Contribution Penalty
    • Building a large amount of retirement savings is, really, a good thing. But if you contribute too much to an IRA, it can cost you.
    • How does this happen?
      • Contributing an amount of money that exceeds the applicable annual contribution limit for your IRA
      • Improperly rolling over money into an IRA
    • So, let’s talk contribution limits. For 2021:
      • The most you can contribute to your Roth and Traditional IRAs is a total of $6,000 if you’re younger than 50 or $7,000 if you’re age 50+.
    • You can only contribute earned income.
      • You must have enough earned income to cover your contribution to an IRA.
      • If your earned income for the year is less than the contribution limit, you can only contribute up to your earned income.
        • For example, if you earned $3,000, you can contribute a maximum of $3,000.
      • These things don’t count as earned income: child support, income from rental property, interest and dividends from investments, Social Security, unemployment benefits, and retirement income.
    • It’s good to max out your IRA contributions, but if you go overboard, the IRS considers it an ineligible (or excess) contribution.
      • If you contribute too much, you’ll owe a 6% penalty on the excess contribution each year until you fix the mistake.
    • The good news is that there are several ways to fix this mistake:
      • Withdraw the excess contribution and any earnings on it before the April tax deadline.
      • If you’ve already filed your tax return, remove the excess contribution and file an amended tax return by the October deadline.
      • Apply the excess to next year’s contribution.
        • You’ll still pay the 6% penalty this year, but you’ll be set going forward.
      • Withdraw the excess next year by Dec. 31st.
        • You’ll pay the penalty for 2 years and then move on.
      • Of course, it’s best to avoid excess contributions altogether.
  • RMDs
    • Retirement plans generally allow you to defer paying taxes on your contributions and income gains for decades. But eventually, Uncle Sam is going to demand his share of that cash.
    • Previously, taxpayers were obligated to take required minimum distributions — also known as RMDs — from most types of retirement accounts beginning the year they turn 70½.
      • The Secure Act of 2019 bumped up that age to 72.
    • The consequences of failing to make these mandatory withdrawals still apply, though. Fail to take your RMDs starting the year you turn 72, and you face harsh penalties.
      • If you do not take any distributions, or if the distributions are not large enough, you may have to pay a 50% tax on the amount not distributed as required.
    • It’s important to note that the RMD rules do not apply to Roth IRAs. You can leave money in your Roth IRA indefinitely — although another provision of the Secure Act means your heirs have to be careful if they inherit your Roth IRA.
      • We talked in-depth about this a couple of weeks ago, and if you missed out, there are multiple ways you can find it!
        • On our website (link to show notes)
        • Anywhere you find your podcasts – just search for the get ready for the future show
        • On our social media!
    • Conway Workshop:
      • 5 Ways Modern Grave Robbers Hurt Your Family
      • June 3rd, 2021, 6:30pm at the Conway Expo and Events Center
      • Click here to register.

 

Flag on the Play!

  • Early Withdrawal
    • Taking money out too soon from a retirement account is another potentially costly mistake.
    • If you pull money from your IRA before the age of 59½, you might be subject to paying income taxes on the money, plus an additional 10% penalty.
    • The same penalties apply to early withdrawals from retirement plans like 401(k)s.
  • While not having an advisor and a personalized plan isn’t technically a penalty, we had to include it in this show.
    • Fact is: studies show that having an advisor (rather than doing it yourself) can boost your retirement accounts over 22.6%.
    • If missing out on nearly a quarter of the wealth you could have isn’t a penalty, we don’t know what is.
  • You’ve worked hard for your money.
    • Our job is to help your money work hard for you.
  • Retirement can be confusing. The GenWealth Ready to Retire Process makes it simple. It covers 7 key areas:
    • Investment strategy
    • Social Security Maximization
    • Creating guaranteed income to meet your basic needs
    • Protect against inflation and providing for lifestyle income
    • Address long-term care needs
    • Reducing taxes during retirement
    • All documented in a written plan (on paper, on purpose)

FINAL THOUGHTS

    • Your hard-earned money belongs in your pocket.
      • Don’t let penalties throw you off track!
  •  
    • There are so many facets to retirement, and it can be hard to keep up with it all.
      • Just because it’s called “financial independence” doesn’t mean you have to go it alone.
  •  
    • Conway Workshop:
      • 5 Ways Modern Grave Robbers Hurt Your Family
      • June 3rd, 2021, 6:30pm at the Conway Expo and Events Center
      • Click here to register.