The Diversified Blog

A wealth management blog dedicated to creating a long lasting sustainable retirement.

Tax Strategies for Retirees

Nothing in life is certain except death and taxes. —Benjamin Franklin

That saying still rings true roughly 300 years after the former statesman coined it. Yet, by formulating a tax-efficient investment and distribution strategy, retirees may keep more of their hard-earned assets for themselves and their heirs. Here are a few suggestions for effective money management during your later years.

Less Taxing Investments

Municipal bonds, or "munis" have long been appreciated by retirees seeking a haven from taxes and stock market volatility. In general, the interest paid on municipal bonds is exempt from federal taxes and sometimes state and local taxes as well (see table).1 The higher your tax bracket, the more you may benefit from investing in munis.

Also, consider investing in tax-managed mutual funds. Managers of these funds pursue tax efficiency by employing a number of strategies. For instance, they might limit the number of times they trade investments within a fund or sell securities at a loss to offset portfolio gains. Equity index funds may also be more tax-efficient than actively managed stock funds due to a potentially lower investment turnover rate.

It's also important to review which types of securities are held in taxable versus tax-deferred accounts. Why? Because the maximum federal tax rate on some dividend-producing investments and long-term capital gains is 20%.* In light of this, many financial experts recommend keeping real estate investment trusts (REITs), high-yield bonds, and high-turnover stock mutual funds in tax-deferred accounts. Low-turnover stock funds, municipal bonds, and growth or value stocks may be more appropriate for taxable accounts.

The Tax-Exempt Advantage: When Less May Yield More



Which Securities to Tap First?

Another major decision facing retirees is when to liquidate various types of assets. The advantage of holding on to tax-deferred investments is that they compound on a before-tax basis and therefore have greater earning potential than their taxable counterparts.

On the other hand, you'll need to consider that qualified withdrawals from tax-deferred investments are taxed at ordinary federal income tax rates of up to 39.6%, while distributions—in the form of capital gains or dividends—from investments in taxable accounts are taxed at a maximum 20%.* (Capital gains on investments held for less than a year are taxed at regular income tax rates.)

For this reason, it's beneficial to hold securities in taxable accounts long enough to qualify for the favorable long-term rate. And, when choosing between tapping capital gains versus dividends, long-term capital gains are more attractive from an estate planning perspective because you get a step-up in basis on appreciated assets at death.

It also makes sense to take a long view with regard to tapping tax-deferred accounts. Keep in mind, however, the deadline for taking annual required minimum distributions (RMDs).

The Ins and Outs of RMDs

The IRS mandates that you begin taking an annual RMD from traditional IRAs and employer-sponsored retirement plans after you reach age 70½. The premise behind the RMD rule is simple—the longer you are expected to live, the less the IRS requires you to withdraw (and pay taxes on) each year.

RMDs are now based on a uniform table, which takes into consideration the participant's and beneficiary's lifetimes, based on the participant's age. Failure to take the RMD can result in a tax penalty equal to 50% of the required amount. TIP: If you'll be pushed into a higher tax bracket at age 70½ due to the RMD rule, it may pay to begin taking withdrawals during your sixties.

Unlike traditional IRAs, Roth IRAs do not require you to begin taking distributions by age 70½.2 In fact, you're never required to take distributions from your Roth IRA, and qualified withdrawals are tax free.2 For this reason, you may wish to liquidate investments in a Roth IRA after you've exhausted other sources of income. Be aware, however, that your beneficiaries will be required to take RMDs after your death.

Estate Planning and Gifting

There are various ways to make the tax payments on your assets easier for heirs to handle. Careful selection of beneficiaries of your money accounts is one example. If you do not name a beneficiary, your assets could end up in probate, and your beneficiaries could be taking distributions faster than they expected. In most cases, spousal beneficiaries are ideal, because they have several options that aren't available to other beneficiaries, including the marital deduction for the federal estate tax.

Also, consider transferring assets into an irrevocable trust if you're close to the threshold for owing estate taxes. In 2016, the federal estate tax applies to all estate assets over $5.45 million. Assets in an irrevocable trust are passed on free of estate taxes, saving heirs thousands of dollars. TIP: If you plan on moving assets from tax-deferred accounts, do so before you reach age 70½, when RMDs must begin.

Finally, if you have a taxable estate, you can give up to $14,000 per individual ($28,000 per married couple) each year to anyone tax free. Also, consider making gifts to children over age 14, as dividends may be taxed—or gains tapped—at much lower tax rates than those that apply to adults. TIP: Some people choose to transfer appreciated securities to custodial accounts (UTMAs and UGMAs) to help save for a grandchild's higher education expenses.

Strategies for making the most of your money and reducing taxes are complex. Your best recourse? Plan ahead and consider meeting with a competent tax advisor, an estate attorney, and a financial professional to help you sort through your options.


Source(s):

1.  Capital gains from municipal bonds are taxable and interest income may be subject to the alternative minimum tax.

2.  Withdrawals prior to age 59½ are generally subject to a 10% additional tax.
*Income from investment assets may be subject to an additional 3.8% Medicare tax, applicable to single-filer taxpayers with modified adjusted gross income of over $200,000, and $250,000 for joint filers.


Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST 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 DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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Frequently Asked Retirement Income Questions

When should I begin thinking about tapping my retirement assets and how should I go about doing so?

The answer to this question depends on when you expect to retire. Assuming you expect to retire between the ages of 62 and 67, you may want to begin the planning process in your mid- to late 50s. A series of meetings with a financial advisor may help you make important decisions such as how your portfolio should be invested, when you can afford to retire, and how much you will be able to withdraw annually for living expenses. If you anticipate retiring earlier, or enjoying a longer working life, you may need to alter your planning threshold accordingly.

How much annual income am I likely to need?

While studies indicate that many people are likely to need between 60% and 80% of their final working year's income to maintain their lifestyle after retiring, low-income and wealthy retirees may need closer to 90%. Because of the declining availability of traditional pensions and increasing financial stresses on Social Security, future retirees may have to rely more on income generated by personal investments than today's retirees.

How much can I afford to withdraw from my assets for annual living expenses?

As you age, your financial affairs won't remain static: Changes in inflation, investment returns, your desired lifestyle, and your life expectancy are important contributing factors. You may want to err on the side of caution and choose an annual withdrawal rate somewhat below 5%; of course, this depends on how much you have in your overall portfolio and how much you will need on a regular basis. The best way to target a withdrawal rate is to meet one-on-one with a qualified financial advisor and review your personal situation.

When planning portfolio withdrawals, is there a preferred strategy for which accounts are tapped first?

You may want to consider tapping taxable accounts first to maintain the tax benefits of your tax-deferred retirement accounts. If your expected dividends and interest payments from taxable accounts are not enough to meet your cash flow needs, you may want to consider liquidating certain assets. Selling losing positions in taxable accounts may allow you to offset current or future gains for tax purposes. Also, to maintain your target asset allocation, consider whether you should liquidate overweighted asset classes. Another potential strategy may be to consider withdrawing assets from tax-deferred accounts to which nondeductible contributions have been made, such as after-tax contributions to a 401(k) plan.

If you maintain a traditional IRA, a 401(k), 403(b), or 457 plan, in most cases, you must begin required minimum distributions (RMDs) after age 70½. The amount of the annual distribution is determined by your life expectancy and, potentially, the life expectancy of a beneficiary. RMDs don't apply to Roth IRAs.

Are there other ways of getting income from investments besides liquidating assets?

One such strategy that uses fixed-income investments is bond laddering. A bond ladder is a portfolio of bonds with maturity dates that are evenly staggered so that a constant proportion of the bonds can potentially be redeemed at par value each year. As a portfolio management strategy, bond laddering may help you maintain a relatively consistent stream of income while managing your exposure to risk.1

In addition, many of today's annuities offer optional living benefits that may help an investor capitalize on the market's upside potential while protecting investment principal from market declines and/or providing minimum future income. Keep in mind, however, that riders vary widely, have restrictions, and that additional fees may apply. Your financial advisor can help you determine whether an annuity is appropriate for your situation.2

When crafting a retirement portfolio, you need to make sure it is positioned to generate enough growth to prevent running out of money during your later years. You may want to maintain an investment mix with the goal of earning returns that exceed the rate of inflation. Dividing your portfolio among stocks, bonds, and cash investments may provide adequate exposure to some growth potential while trying to manage possible market setbacks.


Source(s):

1.  Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise. Bonds are subject to availability and change in price.

2.  Annuity protections and guarantees are based on the claims-paying ability of the issuing insurance company.


Required Attribution

Because of the possibility of human or mechanical error by DST Systems, Inc. or its sources, neither DST 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 DST Systems, Inc. be liable for any indirect, special or consequential damages in connection with subscriber's or others' use of the content.

© 2017 DST Systems, Inc. Reproduction in whole or in part prohibited, except by permission. All rights reserved. Not responsible for any errors or omissions.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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10 Reasons You Will Never Make $1 Million Dollars

Here is a nice article provided by Stacy Rapacon of Kiplinger:


Wealthy people usually aren't born that way. Most spend their lives amassing their fortunes by working hard, spending little, saving a lot and investing wisely. It may sound like a simple strategy, but the fact that the vast majority of Americans fall short of millionaire status proves that it's easier said than done.

Then again, 10.4 million households in the U.S. have $1 million or more in investable assets, according to market research and consulting firm Spectrem Group, and their ranks are growing. So it's not impossible.

Read on to learn what you might be doing to keep yourself out of the millionaire's club. More importantly, find out how you can change your ways and build your own seven-figure nest egg.

1.  You Picked the Wrong Profession

Accumulating wealth starts with your first paycheck, and some jobs can get you going faster than others. According to consulting firm Capgemini's World Wealth Report, many wealthy people today work in technology, finance and medicine—fields that are well represented in our list of the best jobs for the future. Positions in these areas have generous salaries and are in high demand. For example, among our top jobs is nurse practitioner, which has a median salary of more than $97,000 a year. In contrast, a door-to-door sales worker, among our worst jobs for the future, can expect to make about $20,700 a year. Of course, given enough time and the right saving and spending habits, you can build a fortune even with a small salary. But a higher income can certainly make it easier to save more, faster.

What you can do about it

If you're still in school, majoring in a promising field can put you on the path to a lucrative career and help make you a millionaire. But remember: You'll have an easier time working hard for the rest of your life if you have a legitimate interest in your chosen profession.

If you're past your college days, you can still learn some skills to advance your career and increase your earning potential with free online courses.

2.  You Fear the Stock Market

Cash stuffed under your mattress or even deposited in a savings account won't keep up with inflation, much less grow into $1 million. In order to maximize your gains, you need to invest your money wisely. In many cases, that means putting your money mostly in stocks.

Consider the math: According to Bankrate.com, the highest yield you can expect from a money market account right now is 1.26%. If you put away $10,000 in one and added nothing else, in 10 years, with monthly compounding, you'd have about $11,340 total. But if you invested that $10,000 and earned a 6% return, you'd have almost $18,200, or $6,860 more.

What you can do about it

There's no denying that the stock market can take you on a bumpy ride, so your fears are understandable. But steeling yourself and diving in is well worth it. Over the long term, stocks have marched upward and proved to be the investment of choice for expanding wealth.

Savings earmarked for retirement are particularly well suited for the stock market. With a long time horizon, you have time to recover from market dips.

3.  You Don’t Save Enough

If you don't save money, you're never going to be rich. It's hard to get around that obvious (but often ignored) principle. Even if you earn seven figures, if you spend it all, you still net zero.

What you can do about it

Begin saving as soon as possible. The sooner you start putting your money to work, the less you actually have to save. If you start saving at age 35, you'll need to put away $671 each month in order to reach $1 million by the time you turn 65, assuming you earn an 8% annual return. If you wait until you're 45 years old to start saving, you'll have to save $1,698 a month to hit $1 million in 20 years.

How can you start saving? First, you need a budget (more on budgeting later). Lay out all of your expenses to see where your money is going. Then, you can figure out where you can trim costs and save. Any little bit you can muster is a good start. And whenever you get a bonus or some extra cash—for example, after selling some belongings or getting a generous birthday gift—add it to your savings before you have time to think of ways you can spend it.

4.  You Live Beyond Your Means

Spending more than you earn can put you in a dangerous hole of debt. On the bright side, you won't be in there alone: According to the National Foundation for Credit Counseling, one in three American households carries credit card debt from month to month. And among those balance-carrying households, the average credit-card debt is $16,048, according to financial research firm ValuePenguin.

What you can do about it

Again, you need to have a budget to make sure you have more money coming in than going out. With the availability of credit, it's easy to fall into thinking you can afford more than you actually can. But, as Knight Kiplinger has pointed out, "the biggest barrier to becoming rich is living like you're rich before you are."

Even once you are rich, you may still want to live like you're not. According to U.S. Trust's Insights on Wealth and Worth survey, the majority of millionaires don't actually consider themselves "wealthy." If you don't think of yourself as well off, and you maintain the same lifestyle after your income and savings increase, you can put away even more for your short- and long-term goals without losing an ounce of comfort.

5.  You overlook the value of nickels and dimes

No, we're not suggesting that you search for loose change under your sofa cushions. Rather, cutting seemingly insignificant expenses—such as baggage charges on your flights, late-payment penalties on your bills and out-of-network ATM fees on your cash withdrawals—can add up to substantial savings.

Investing fees attached to mutual funds and 401(k) plans can be especially detrimental. For example, let's assume you currently have $25,000 saved in your 401(k) and earn 7% a year, on average. If you pay fees and expenses of 0.5% a year, your account would grow to $227,000 after 35 years. But increasing the extra charges to 1.5% annually would mean your account would grow to just $163,000 over that time.

What you can do about it

More than you realize. Pay attention to the fine print, and avoid those sneaky extra charges. You can skip airline baggage fees by packing lightly and bringing only a carry-on or by flying Southwest Airlines, which allows you to check two bags free. If you make a late payment on a credit card, ask the issuer to waive the fee. Long-time customers who usually pay on time are often given a pass. For more, see How to Avoid Paying 21 Annoying Fees.

For your 401(k), you can see how it rates with other plans at www.brightscope.com. You can select low-cost mutual funds to lower your investing costs. (Check out the Kiplinger 25, a list of our favorite no-load funds.) Also consider talking to your employer about the possibility of lowering the plan's fees.

6.  You are drowning in debt

Again, debt can be a danger to your financial well-being. If you're constantly paying credit card bills and racking up interest, you won't have a chance to save any money.

But not all debt is bad. Borrowing to go to school, to get professional training or to start your own business can help boost your career and income potential. Especially in a low-interest-rate environment, the investment can be well worth it. In fact, borrowing funds is one of the most preferred funding strategies used by high-net-worth individuals with 60% opting to use bank credit before tapping their own holdings for quick cash, according to U.S. Trust.

What you can do about it

If you already have some debt troubles, be sure to devise a repayment plan. One strategy is to pay off the debt with the highest interest rate first. The sooner you clear that away, the more you save on interest. Another strategy is to pay off the smallest debt first to give yourself a psychological boost and encourage you to keep chipping away.

If you're considering taking out new loans—to go back to school or seed your business, for example—make sure you understand all the terms, including your interest rate and repayment details, so you can decide whether it's truly worth it.

7.  You neglect your health

You need to work to make money, and you need to be healthy in order to work. The rich understand that, and 98% of millionaires consider good health to be their most important personal asset, according to U.S. Trust.

What you can do about it

Take care of yourself—and do it on the cheap. You can take advantage of free wellness programs offered by your employer, as well as free preventive-care services guaranteed by federal law, such as blood pressure screenings, mammograms for women older than 40 and routine vaccinations for children. Also try to quit any bad health habits, such as smoking or excessive drinking, that can cost you dearly.

8.  You don't have a budget

Without a budget, it's easy to lose track of how much you're spending and live beyond your means. Working toward financial goals, such as saving for a vacation, buying a house or funding your retirement, can also prove difficult if you don't have a well-thought-out plan.

What you can do about it

Do what the majority of millionaires do: Establish a budget. Knowing where your money is going helps you identify ways to keep more in your pocket. Break out the pencil, paper and calculator to lay out your income and expenses.

Or go digital with your finances by using a budgeting Web site such as Mint or BudgetPulse to help you track your spending. With Mint, you provide your usernames and passwords for bank accounts, credit cards and other financial accounts, and the site organizes your money movement for you. Your bank or credit card issuer might offer similar tools to help you analyze your spending habits.

9.  You pay too much in taxes

Did you get a tax refund this year? Receiving that lump-sum payment from Uncle Sam may seem like a good thing. But it actually means that you've loaned the government money without earning any interest.

What you can do about it

Adjust your tax withholding. You can use our tax-withholding calculator to see how much you can fatten your paycheck by doing so. If you got a $3,000 refund (about average for 2015), claiming an additional three allowances on your Form W-4 can boost your monthly take-home pay by $250. The extra money, which can be invested in stocks or deposited in an interest-bearing account, should start showing up in your next paycheck.

Such a sum may not lend itself to millionaire status on its own, but being mindful of taxes is important to increasing—and keeping—your wealth. Indeed, 55% of high-net-worth investors prioritize minimizing taxes when it comes to investment decisions. A couple of smart tax-planning strategies you should consider: picking the right tax-deferred retirement savings accounts and holding investments long enough to qualify for the lower, long-term capital gains tax. Even choosing the right state to live in can have a big impact on your finances when it comes to taxes.

10.  You lack purpose in your life

There's more to life than money, and wealthy people know it. According to U.S. Trust, 94% of millionaires say they have a clear sense of purpose in their lives. "Whatever that purpose or direction happens to be—whether it's their family, their family legacy, philanthropy or stewardship of a business—[knowing their purpose means] they have the emotional maturity to focus on it and make decisions in the context of what's most important to them," says Paul Stavig, managing director and wealth strategist of U.S. Trust.

What you can do about it

Entire religions and philosophies are dedicated to helping people figure out what they're meant to do in this life. We won't try to compete. But we will note that a clear purpose can help motivate you to make and save more. Indeed, 76% of millionaires recognize that money can give you the opportunity to create change and fulfill your life's purpose.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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9 IRS Audit Red Flags for Retirees

Here is a nice article provided by Joy Taylor of Kiplinger:


In 2015, the Internal Revenue Service audited only 0.84% of all individual tax returns. So the odds are generally pretty low that your return will be picked for review.

That said, your chances of being audited or otherwise hearing from the IRS escalate depending on various factors. Math errors may draw an IRS inquiry, but they’ll rarely lead to a full-blown exam. Whether you're filing your 2015 return in October after getting an extension or looking ahead to filing your 2016 return early next year, check out these red flags that could increase the chances that the IRS will give the return of a retired taxpayer special, and probably unwelcome, attention.

1.  Making a Lot of Money

Although the overall individual audit rate is only about one in 119, the odds increase dramatically as your income goes up, as it might if you sell a valuable piece of property or get a big payout from a retirement plan.

IRS statistics show that people with incomes of $200,000 or higher had an audit rate of 2.61%, or one out of every 38 returns. Report $1 million or more of income? There's a one-in-13 chance your return will be audited. The audit rate drops significantly for filers reporting less than $200,000: Only 0.76% (one out of 132) of such returns were audited, and the vast majority of these exams were conducted by mail.

We're not saying you should try to make less money—everyone wants to be a millionaire. Just understand that the more income shown on your return, the more likely it is that you'll be hearing from the IRS.

2.  Failing to Report All Taxable Income

The IRS gets copies of all 1099s and W-2s you receive. This includes the 1099-R (reporting payouts from retirement plans, such as pensions, 401(k)s and IRAs) and 1099-SSA (reporting Social Security benefits).

Make sure you report all required income on your return. IRS computers are pretty good at matching the numbers on the forms with the income shown on your return. A mismatch sends up a red flag and causes the IRS computers to spit out a bill. If you receive a tax form showing income that isn't yours or listing incorrect income, get the issuer to file a correct form with the IRS.

3.  Taking Higher-Than-Average Deductions

If deductions on your return are disproportionately large compared with your income, the IRS may pull your return for review. A large medical expense could send up a red flag, for example. But if you have the proper documentation for your deduction, don't be afraid to claim it. There's no reason to ever pay the IRS more tax than you actually owe.

4.  Claiming Large Charitable Deductions

We all know that charitable contributions are a great write-off and help you feel all warm and fuzzy inside. However, if your charitable deductions are disproportionately large compared with your income, it raises a red flag.

That's because the IRS knows what the average charitable donation is for folks at your income level. Also, if you don't get an appraisal for donations of valuable property, or if you fail to file Form 8283 for non-cash donations over $500, you become an even bigger audit target. And if you've donated a conservation or facade easement to a charity, chances are good that you'll hear from the IRS.


Be sure to keep all your supporting documents, including receipts for cash and property contributions made during the year.

5.  Not Taking Required Minimum Distributions

The IRS wants to be sure that owners of IRAs and participants in 401(k)s and other workplace retirement plans are properly taking and reporting required minimum distributions. The agency knows that some folks age 70½ and older aren’t taking their annual RMDs, and it’s looking at this closely.

Those who fail to take the proper amount can be hit with a penalty equal to 50% of the shortfall. Also on the IRS’s radar are early retirees or others who take payouts before reaching age 59½ and who don’t qualify for an exception to the 10% penalty on these early distributions.

Individuals age 70½ and older must take RMDs from their retirement accounts by the end of each year. However, there’s a grace period for the year in which you turn 70½: You can delay the payout until April 1 of the following year. A special rule applies to those still employed at age 70½ or older: You can delay taking RMDs from your current employer’s 401(k) until after you retire (this rule doesn’t apply to IRAs). The amount you have to take each year is based on the balance in each of your accounts as of December 31 of a prior year and a life-expectancy factor found in IRS Publication 590-B.

6.  Claiming Rental Losses

Claiming a large rental loss can command the IRS’s attention. Normally, the passive loss rules prevent the deduction of rental real estate losses. But there are two important exceptions. If you actively participate in the renting of your property, you can deduct up to $25,000 of loss against your other income. This $25,000 allowance phases out at higher income levels. A second exception applies to real estate professionals who spend more than 50% of their working hours and more than 750 hours each year materially participating in real estate as developers, brokers, landlords or the like. They can write off losses without limitation.

The IRS is actively scrutinizing rental real estate losses. If you’re managing properties in your retirement, you may qualify under the second exception. Or, if you sell a rental property that produced suspended passive losses, the sale opens the door for you to deduct the losses. Just be ready to explain things if a big rental loss prompts questions from the IRS.

7.  Failing to Report Gambling Winnings or Claiming Big Losses

Whether you’re playing the slots or betting on the horses, one sure thing you can count on is that Uncle Sam wants his cut. Recreational gamblers must report winnings as other income on the front page of the 1040 form. Professional gamblers show their winnings on Schedule C. Failure to report gambling winnings can draw IRS attention, especially because the casino or other venue likely reported the amounts on Form W-2G.

Claiming large gambling losses can also be risky. You can deduct these only to the extent that you report gambling winnings. And the costs of lodging, meals and other gambling-related expenses can only be written off by professional gamblers. Writing off gambling losses but not reporting gambling income is sure to invite scrutiny. Also, taxpayers who report large losses from their gambling-related activity on Schedule C get an extra look from IRS examiners, who want to make sure that these folks really are gaming for a living.

8.  Writing Off a Loss for a Hobby

Your chances of "winning" the audit lottery increase if you file a Schedule C with large losses from an activity that might be a hobby—dog breeding, jewelry making, coin and stamp collecting, and the like. Agents are specially trained to sniff out those who improperly deduct hobby losses. So be careful if your retirement pursuits include trying to convert a hobby into a moneymaking venture.

You must report any income from a hobby, and you can deduct expenses up to the level of that income. But the law bans writing off losses from a hobby.

To be eligible to deduct a loss, you must be running the activity in a business-like manner and have a reasonable expectation of making a profit. If your activity generates profit three out of every five years (or two out of seven years for horse breeding), the law presumes that you're in business to make a profit, unless the IRS establishes otherwise. If you're audited, the IRS is going to make you prove you have a legitimate business and not a hobby. Be sure to keep supporting documents for all expenses.

9.  Neglecting to Report a Foreign Bank Account

Just because you may be traveling more in retirement, be careful about sending your money abroad. The IRS is intensely interested in people with money stashed outside the U.S., and U.S. authorities have had lots of success getting foreign banks to disclose account information. The IRS also uses voluntary compliance programs to encourage folks with undisclosed foreign accounts to come clean—in exchange for reduced penalties. The IRS has learned a lot from these amnesty programs and has been collecting a boatload of money (we’re talking billions of dollars). It’s scrutinizing information from amnesty seekers and is targeting the banks that they used to get names of even more U.S. owners of foreign accounts.

Failure to report a foreign bank account can lead to severe penalties. Make sure that if you have any such accounts, you properly report them.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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12 Reasons You Will Go Broke in Retirement

Here is a nice article provided by Stacy Rapacon of Kiplinger:

 

Retirement is a major milestone that brings many life changes. One thing that doesn't change for most people: the fear of running out of money. According to the Transamerica Center for Retirement Studies, the most frequently reported retirement worry is outliving savings and investments. Across all ages, 51% of respondents cited this concern, and 41% of retirees claim the same fear. Additionally, only 46% of retirees think they've built a nest egg large enough to last through retirement.

Now is the time to face your fears. Take a look at a dozen ways you could go broke in retirement and learn how to avoid them. Some you can avert with careful planning; others you have little control over. But you can prepare your finances to make the best of whatever may come.

1.  You Abandon Stocks:

It's true that stocks can be risky. For example, so far in 2016, Standard & Poor's 500-stock index, a benchmark for many investors, has experienced several wild swings, opening with a 5% decline in January and including a headline-grabbing, single-day drop of 3.4% on June 24 in response to the Brexit. So once you're retired, you might be inclined to move your money out of stocks altogether and instead focus on preserving your wealth.

But that would be a mistake. Despite the volatility, the S&P 500 is up about 6% year-to-date, as of mid October 2016. Without stocks, "you don't get the growth that you need," says Carrie Schwab-Pomerantz, senior vice president at Charles Schwab and author of The Charles Schwab Guide to Finances After Fifty. "You need your money to continue to grow through those 20 to 30 years of retirement." She recommends maintaining a stock allocation of at least 20% during retirement for your portfolio to outpace inflation and help maintain your lifestyle.

2.  You invest too much in stocks:

On the other hand, you're right: Stocks are risky. "You don't want to have too much in stocks, especially if you're so reliant on that portfolio, because of the volatility of the market," says Schwab-Pomerantz. There's no one-size-fits-all formula, but for the average investor Schwab-Pomerantz recommends moving to 60% stocks as you approach retirement, then trimming back to 40% stocks in early retirement. Later in retirement, allocate 20% to stocks.

If you're hesitant to make these portfolio adjustments yourself and don't want to work with a financial adviser, consider investing in target-date mutual funds instead. These funds are designed to reduce exposure to stocks gradually over time as you approach (and surpass) your target date for retirement. Not all target-date funds are the same, even if they sport the same retirement target year in their names. Be aware of specific funds' expenses and asset-allocation strategies to ensure they are affordable and fit your needs.

3.  You Live Too Long:

More time to enjoy the life you love is a joy; trying to afford it can be a pain. Current retirees are expecting a long retirement—a median of 28 years, according to the Transamerica Center for Retirement Studies. And 41% of retirees expect their retirements to go on for more than three decades. Women have to plan for an even longer life. According to the Centers for Disease Control and Prevention, a man who was age 65 in 2014 can expect to live to age 83, on average, while a woman of the same age may reach 85.5 years.

When saving for retirement, plan for a long life. But if it starts to look like your nest egg will come up short, you have to adjust your budget. For example, it might behoove you to downsize your home or relocate to an area with low taxes and living costs. You may even consider finding ways to pull in extra income, such as starting an encore career, taking a part-time job or cashing in on the sharing economy, if you can.

4.  You Spend Too Much:

It might seem obvious, but most of us—retired or not—are guilty of making this mistake and could benefit from a reminder to quit it. In fact, according to the Employee Benefit Research Institute, nearly 46% of retired households spent more annually in their first two years of retirement than they did just before retiring.

And retirees on a fixed income are particularly vulnerable to the ill effects of committing this error. "One of the biggest mistakes, I think, is that people continue to spend the way they did in their earning years without taking a close look at their current income," says Schwab-Pomerantz. "For retirees, budgeting is more important than ever." (Use Kiplinger's Household Budgeting Worksheet to get your expenses under control.)

5.  You rely on a single source of income:

Multiple income streams are better than one, especially in retirement. Case in point: Social Security is the primary source of income for 61% of retirees, according to the Transamerica Center for Retirement Studies. And 44% of retirees report that one of their biggest financial fears is that Social Security will be reduced or cease to exist in the future. Based on current projections, Social Security will only be able to pay 77% of promised retirement benefits beginning in 2035.

A pension, which 42% of retirees use as a source of income, or inheritance likely can't stand alone to support you through retirement, either. But when you put them all together, along with your self-funded retirement accounts—such as 401(k)s and IRAs—then you have a more stable and diversified financial base to rely on throughout your retirement.

6.  You can't work:

Another good reason for needing plenty of savings and multiple streams of income to support you in retirement: You can't count on being able to bring in a paycheck if you need it. While 51% of workers expect to continue working some in retirement, only 6% of retirees report working in retirement as a source of income.

Whether you work is not always up to you. In fact, 60% of retirees left the workforce earlier than planned, according to the Transamerica Center for Retirement Studies. Of those, 66% did so because of employment-related issues, including organizational changes at their companies, losing their jobs and taking buyouts. Health-related issues—either their own ill health or that of a loved one—was cited by 37%. Just 16% retired early because they felt they could afford to.

7.  You get sick:

As you age, your health is bound to deteriorate, and getting the proper care is expensive. According to a 2015 report from the Employee Benefit Research Institute, a 65-year-old man would need to save $68,000 to have a 50% chance of affording his health-care expenses in retirement (excluding long-term care) that aren't covered by Medicare or private insurance. To have a 90% chance, the same man would need to save $124,000. The news is worse for a 65-year-old woman, who would need to save $89,000 and $140,000, respectively. Be sure you're doing all you can to cut health-care costs in retirement by considering supplemental medigap and Medicare Advantage plans and reviewing your options every year.

Long-term care bumps up the bill even more. For example, the median cost for adult day health care in the U.S. is $1,473 a month; for a private room in a nursing home, it costs a median of $7,698 a month, according to Genworth. No wonder 44% of retirees fear declining health that requires long-term care and 31% fear cognitive decline, dementia and Alzheimer's disease. Consider getting long-term-care insurance to help cover those costs, and use these tactics to make it affordable.

8.  You tap the wrong retirement accounts:

This mistake probably won't leave you flat broke, but lacking a smart withdrawal strategy can cost you. The most tax-efficient way to go, suggests Schwab-Pomerantz, is to draw down the principal from your maturing bonds and certificates of deposit first, since they are no longer bearing interest. Next, if you're 70½ or older, take your required minimum distributions from your traditional tax-deferred accounts, such as IRAs and 401(k)s, focusing on assets that are overweighted or no longer appropriate for your portfolio. You face a stiff penalty from the IRS for neglecting to take RMDs on time.

Then, sell from your taxable accounts, for which you only have to pay the capital-gains tax. (Note: Retirees in the two lowest income tax brackets pay no tax at all on their capital gains.) Finally, withdraw from your tax-deferred and Roth accounts, in that order.

9.  You don't consider taxes:

Needing to be tax-smart extends beyond your drawdown strategy (see #8). Where you live impacts what you pay in taxes big time. That's part of why so many people flock to Florida and Arizona after they retire. Along with the warm weather and ample sunshine, those states offer two of the country's ten most tax-friendly environments for retirees. Other states with retirement-friendly tax codes include Alaska, Georgia and Nevada.

Of course, taxes alone shouldn't dictate where you live in retirement. Friends, family and other community ties play a major role. But you have to keep state and local taxes in mind (especially sales taxes, property taxes and taxes on retirement income) when planning your budget. Take a look at our state-by-state guide to taxes on retirees for more.

10.  You bankroll the kids:

A mistake made out of love is a mistake all the same. You may feel obligated to assist your children financially—paying for college, contributing to the down payment for a first home and covering them in emergencies, for example. But doing so at the expense of your retirement security may cause bigger problems for both you and your kids in the long run.

"It sounds awful to think a parent won't help [his children], but you're only going to become a drag on your kids eventually if you don't really focus on your own financial security during those later years," says Schwab-Pomerantz. "You gotta take care of yourself first."

11.  You are underinsured:

Cutting costs in retirement is important, but scrimping on insurance might not be the best place to do it. Adequate health coverage, in particular, is essential to prevent a devastating illness or injury from wiping out your nest egg. Medicare Part A, which covers hospital services, is a good start. It’s free to most retirees. But you’ll need to pay extra for Part B (doctor visits and outpatient services) and Part D (prescription drugs). Even then, you’ll probably want a supplemental medigap policy to help cover deductibles, copayments and such. "Medicare is very complex, and it's more expensive than people realize," says Schwab-Pomerantz. "So it definitely needs to be part of the budgeting process."

And don't forget about other forms of insurance. As you age, your chances of having accidents both at home and on the road increase. In fact, according to the Centers for Disease Control and Prevention, an average of 586 adults who are 65 and older are injured every day in car crashes. Beyond your own medical expenses, all it can take is a single adverse ruling in an accident-related lawsuit to drain your retirement savings. Review the liability coverage that you already have through your auto and home policies. If it’s not sufficient, either bump up the limits or invest in a separate umbrella liability policy that will kick in once your primary insurance maxes out. Premiums on a $1 million umbrella policy might run about $300 a year.

12.  You get scammed:

Older adults are particularly vulnerable to scam artists and fraudsters. The FBI notes that seniors are prime targets for such criminals because of their presumed wealth, relatively trusting nature and typical unwillingness to report these crimes. Even worse, the perpetrators may be closer than you think. According to a study from MetLife and the National Committee for the Prevention of Elder Abuse, an estimated one million elders lose $2.6 billion a year due to financial abuse—and family members and caregivers are the perpetrators 55% of the time.

Some common scams to watch out for: Con artists may pretend to represent Medicare to collect your personal information. Cheap prescription drugs marketed online could be knock-offs, and you may be handing over your credit card information in exchange for endangering your health. Charity workers seeking donations for disaster aid might actually pocket the money for themselves. See our advice on how to protect yourself from fraudsters.


Robert J. Pyle, CFP®, CFA is president of Diversified Asset Management, Inc. (DAMI). DAMI is licensed as an investment adviser with the State of Colorado Division of Securities, and its investment advisory representatives are licensed by the State of Colorado. DAMI will only transact business in other states to the extent DAMI has made the requisite notice filings or obtained the necessary licensing in such state. No follow up or individualized responses to persons in other jurisdictions that involve either rendering or attempting to render personalized investment advice for compensation will be made absent compliance with applicable legal requirements, or an applicable exemption or exclusion. It does not constitute investment or tax advice. To contact Robert, call 303-440-2906 or e-mail This email address is being protected from spambots. You need JavaScript enabled to view it. .

The views, opinion, information and content provided here are solely those of the respective authors, and may not represent the views or opinions of Diversified Asset Management, Inc.  The selection of any posts or articles should not be regarded as an explicit or implicit endorsement or recommendation of any such posts or articles, or services provided or referenced and statements made by the authors of such posts or articles.  Diversified Asset Management, Inc. cannot guarantee the accuracy or currency of any such third party information or content, and does not undertake to verify or update such information or content. Any such information or other content should not be construed as investment, legal, accounting or tax advice.

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