THE FISCAL BLUE PRINT
WITH COACH JEFF MONTGOMERY
Episode 18: Q&A- RMD’s, Taxes in Delaware, Social Security & More!
So today we are going to answer some listener questions on a variety of topics. We will try to get to 2 or 3 questions on today’s show. I personally love the Q&A shows because we can get into a variety of topics like SS, taxes in retirement, investment planning, lifestyle questions………….
(2:00) If you have a question, there are multiple ways to get them over to us to be answered on a future show.
#1 Record a question directly from our podcast page. You’ll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.
#3 give us a call to 855-97-coach …..which is 855-972-6224
Disclaimer: Please do not take advice from me on this show. As a licensed Fiduciary I am only allowed to give advice to clients. Unless you’re a client I can’t give you advice because I don’t know you. Think of this as helpful hints and education only! And please, before implementing any information or ideas you hear on this show always consult your legal adviser, your tax adviser, and your financial adviser.
(3:00) Practical Planning Segment: So last week we gave out a little teaser with the next question on our Q& A show. The question was about RMD’s at age 70 ½ and whether you would be penalized if you do not take it.
When you have an IRA do you have to take money from it at age 70 or be penalized?
Yes. Current law requires that an initial RMD must be taken not later than the April 1 of the year following the year the retiree turns age 70 ½ (hopefully that will soon be age 72). At first sight, this seems to allow a deferral of one year, but it also means that the retiree must take two distributions in that first year. From a tax standpoint, it is generally better to spread the RMDs out.
There are potential changes afoot in the retirement arena, and some of those changes could be potentially beneficial for a lot of retirees. On March 29, the House Ways and Means Committee unveiled HR 1994, or the SECURE (Setting Every Community Up for Retirement Enhancement) Act. This is a bipartisan bill, co-sponsored by Rep Ron Kind (D-Wi), ranking member Kevin Brady (R-Tx) and Mike Kelly, (R-Pa). On April 1, the Senate, in a similar move, introduced a companion bipartisan bill, RESA (the Retirement Enhancement and Savings Act).
There are three possible changes to IRAs that will create planning opportunities:
Required Minimum Distributions (RMD) at age 72 instead of 70 ½. This would constitute a significant change in the IRA rules. Current legislation mandates a Required Minimum distribution or RMD from an IRA after attaining age 70 ½. The regulations provide that an IRA owner must take a distribution no later than the April 1 of the year after the year they turn age 70 ½, and every year thereafter. An IRA owner can take the RMD any time during the year. IRA owners 70 ½ and over may also use their RMD to fund charitable contributions.
The House version of the Bill moves the RMD starting age to age 72, which will allow retirees to have more discretion in when to take their RMD and to delay it if they so desire. We looked at a $1M IRA. Under the current rules, they would begin RMD in the year they attained 70 ½. If they made 7% on their IRA investments and took their RMD at year-end, they would have a significantly larger IRA throughout retirement, primarily due to accumulating IRA assets for an additional period of time.
Thus, our retiree, by delaying RMD from age 70 ½ to age 72, will see around an additional $78,000 in actual RMDs to age 95 and have a balance at age 95 that would be about $81,000 larger. Note this proposed rule does not stop the retiree from making earlier distributions. Our retiree could choose to take distributions earlier.
Second significant change: IRA contributions after age 70 ½. Another change that the proposals (both versions) include is allowing individuals to make contributions to traditional IRAs after age 70 ½. The House and Senate have recognized that many people continue to work after retirement and prohibiting them from contributing to a traditional (deductible) IRA is contrary to retirement safety. The law has allowed post-70 ½ contributions to a Roth IRA. You must have earned income to make a contribution to an IRA although the rule is that both spouses can make a contribution even if only one works. The current law allows a married 72-year-old couple in which at least one spouse had earned income of $15,000 to contribute $14,000 to Roth IRAs. If the proposed changes are enacted, they could also contribute to a traditional IRA and prospectively deduct their contributions.
The third significant change entails a massive shift in naming IRA beneficiaries. Most notably, this proposed change will eliminate the ‘stretch’ IRA distribution rules for non-spouse beneficiaries. This will have a considerable effect on family wealth planning (estate planning) and that deserves our full attention.
Change is afoot; a long-awaited and welcome change. Instead of partisan arguments, we’re seeing collaboration and cooperation from both sides of the aisle in both houses. I’m encouraged by the effort of our Representatives to improve the lives and futures of real, everyday people. Stay tuned
(20:45) Next question…
This one comes from a listener in Delaware……… Are withdrawals from an IRA subject to Delaware State Income tax?
Link to Article: https://smartasset.com/retirement/delaware-retirement-taxes#delaware
Is Delaware tax-friendly for retirees?
Yes. It is one of just four states with no sales tax at the state or local level. It has the fourth lowest property tax rates of any state. It does not tax Social Security income. Delaware does not have an estate or inheritance tax. It provides a deduction of up to $12,500 on income from pensions or retirement savings accounts.
Is Social Security taxable in Delaware?
No. Delaware fully exempts all Social Security income from its state income tax. (P.S. Neither does Maryland)
Are other forms of retirement income taxable in Delaware?
Yes, but they are also eligible for a deduction. The deduction varies depending on the age of the taxpayer. For taxpayers less than 60 years old, the deduction is $2,000 per person. For taxpayers age 60 or older, the deduction is $12,500.
The deduction applies to the combined total of all retirement income from pensions and retirement accounts like a 401(k) or an IRA. If you are 65 or older and have $12,500 or less in income from these sources, you will not pay income tax on them.
Any retirement income in excess of the deduction will be included with other sources of income as part of your taxable income, to which Delaware’s state tax rates apply. The table below shows income tax rates in Delaware.
How high are property taxes in Delaware?
Delaware’s average effective property tax rate is a mere 0.55%. That means a homeowner could expect to pay $550 in taxes for every $100,000 in home value.
Housing costs in Delaware are far lower than those of most other states in the Mid-Atlantic but still about 8% higher than the national average. The median home value in the state is around $230,000.
What is the Delaware senior school property tax credit?
The senior school property tax credit is a form of property tax relief for seniors in Delaware. To qualify, you must be age 65 or older and own a home in the state as your primary residence. The credit is equal to 50% of school property taxes, up to a maximum of $400 per year.
(26:30) The next question involves whether or a not a widow can collect on her deceased husband social security. The callers husband passed away when the caller was 50 years old. Her late husband had begun taking ss prior to passing away. The caller remarried 2 years after his passing. She is now 60 yrs old and still married to her 2nd husband. She wants to know if she is eligible for SS spousal benefits from her late husband.
If she was eligible, it would be a survivor benefit, not a spousal benefit. There is a difference. Normally, she would be eligible, but she got remarried. If she did not get remarried, then yes, she would be eligible for a survivor benefit.
Link to Article: https://smartasset.com/life-insurance/social-security-death-benefits
After a worker eligible for primary Social Security benefits dies, a few classes of protected individuals are entitled to claim auxiliary survivor benefits (equal to 100% of the deceased’s benefits). The folks with this kind of Social Security eligibility include:
- Surviving spouses (a.k.a. widows and widowers) married for at least 10 years, who can start collecting reduced benefits when they turn 60 and full survivor benefits at full retirement age. (as long as you have not remarried)
- Surviving divorced spouses married for at least 10 years, who can collect reduced benefits from age 62 and full benefits at their full retirement age, provided they don’t remarry
- Dependent parents, if the worker’s financial support made up at least half of their support
- Minor children up to age 18, or up to age 19 if still in secondary school
- Adult children if disabled before age 22
- The mother or father of the deceased’s children (including an ex-spouse), who is caring for the deceased’s minor children, can claim Social Security death benefits until the children reach age 16
What if I remarry?
If you wait until age 60 to remarry (or age 50 if you are disabled), your new civil status won’t affect your eligibility for survivor benefits. Again, lots of people leave money on the table by making big life decisions without consulting the Social Security cut-offs.
If for some reason, this caller ended up getting divorced, then she would be entitled to her deceased spouses SS survivor benefit. Don’t get any ideas here!
So as a final word……………… keep those questions coming in! 3 ways to get questions to us:
- Record a question directly from our podcast page. You’ll see an orange button that says start recording. Click that button and you can record your voice and send in a question. Make sure you give us permission to play your question on the next podcast.
- Send us an email directly to email@example.com. Again that’s firstname.lastname@example.org
- Give us a call to 855-97-COACH …..which is 855-972-6224
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