Tuesday, March 31, 2015

The ABLE Account: A New Savings Plan for Disabled Individuals

Pathways Advisory Group. Inc.
Michelle Carter, CFP®

On December 19th, President Obama signed the Achieving Better Life Expectancy Act (ABLE Act) into law.  This provides an opportunity to set aside savings (an ABLE account) for significantly disabled individuals, without impacting their ability to qualify for disability benefits (provided the onset of the disability was prior to age 26).  Previously, this could be accomplished using a Special Needs or Pooled Trust; however, this new “ABLE account” will offer more choice and control, with less complications and cost.

Currently, any significant assets (cash savings, retirement accounts, etc) held by a disabled person with a value of $2000 or more must be reported, and could impact his or her ability to receive government disability-related benefits.  An ABLE account will not be subject to this limitation.  It will also have a tax-advantages, as all income from this account is tax-free, when used for qualified disability-related expenses (contributions to the account are not tax-deductible).  These qualified expenses could include health costs, education, housing, transportation, employment training, financial services and so on.

There are some limitations… Each individual can only have one ABLE account (although multiple people can contribute to one account).  The annual contribution limit for 2015 is $14,000, and will likely be indexed for inflation.  The total amount allowed in the account will vary by state, but will likely match 529 Plan guidelines (currently $371,000 in California).  Once the account surpasses $100,000 in value, SSI benefits may be suspended, but Medi-cal will not be impacted regardless of the account value. 
Each state will offer its own ABLE account plan (or partner up with another state’s plan).  The Secretary of the Department of the Treasury is currently working to develop regulations.  It is expected ABLE account plan options will begin rolling out before year-end.  As with 529 Plans, it is also expected states are likely to offer opportunities to invest in the market within the ABLE accounts.

It is estimated more than 5.8 million individuals and their families will benefit from the ABLE Act.

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Friday, March 20, 2015

2015 IRS Refund Status

For those of you expecting a tax refund, the IRS has a tool you can use to determine the status of your refund on their website. Click here to check where your refund is.

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Friday, March 13, 2015

Roth IRA for Grandkids

Pathways Advisory Group, Inc.
Jeff Karst, CFP®

Recently, I was given an article from a client about leaving your Roth IRA to your grandchildren.  We all love our children, but grandchildren are loved a little bit more (at least that’s what my parents tell me).  Are there advantages to a grandchild inheriting a Roth IRA?

If your child does not need (or want) the Roth IRA, should it be left to him or her?  Let’s take Mary for example.  Mary knows that her only son, Bob, will inherit the majority of her assets (house, Traditional IRA, other investment accounts, etc.)  She wonders what she should do with her $100,000 Roth IRA.
Let’s assume that Mary dies at age 75 when Bob is 45 (Bob’s daughter, Sarah, is only 15).  Bob’s life expectancy at age 45 (according to the IRS) is 38.8 years.  If Bob takes only the Required Minimum Distribution (RMD) each year and earns 10%, when he dies at 75 he will have withdrawn $468,000.  The remaining balance would be $385,000, which is left to Sarah.  Unfortunately, Sarah must continue withdrawing based on the life expectancy of her dad.  She will continue to withdraw the $385,000 over the remaining 8 years.  When Sarah is 53, the Roth IRA must be completely withdrawn.

Now, let’s assume that Mary decides to skip Bob for the Roth IRA.  Sarah inherits the Roth IRA at only age 15.  Mary named Bob as custodian so that he can handle the Roth for Sarah until she reaches a certain age (California allows up to age 25).  At age 15, Sarah’s life expectancy (according to the IRS) is 67.9 years.  This means that those early RMDs are much smaller for Sarah than they were for Bob.  If we use the same assumptions (only the RMD is withdrawn and the account earns 10%), then when Sarah is 53 the account will be worth over $1.7 million.  She still would have withdrawn almost $600,000 via the RMDs – all Tax-Free!

The ability to compound a Roth IRA over a longer time period adds tremendous value to Mary’s legacy.  What better way to start your grandchildren in life, then inheriting a Roth IRA? 

Disclaimer:  Please discuss any beneficiary changes with your financial planner and/or estate planning attorney.

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