Retirees Should Know These 3 Facts About Required Minimum Distributions

USA Retirees Should Know These 3 Facts About Required Minimum Distributions (RMD) 

Neglecting to withdraw a required minimum distribution (RMD) from an IRA by the due date brings about a painful tax code penalty: 50%. Yes, you read that right.

If you are supposed to withdraw at least $4,000 and (uh oh!) did not do as such, you have to write the IRS a check for $2,000. Keep in mind that on January 1, 2020, the RMD rules were modified.

Evergy Inc (EVRG), a current top ranked dividend stock."

Like many investors, you're likely aiming to build a comfortable nest egg to ensure a comfortable retirement. Among retirement financial planners, this is called the "accumulation phase." In this phase, your goal is to invest wisely by choosing stocks with long-term potential for your retirement portfolio, such as Evergy Inc (EVRG), a current top ranked dividend stock.

But that's just half of retirement planning. The second part, the "distribution phase," sometimes gets overlooked even though it can be more fun to think about. That's because the distribution phase is where you determine how to spend your hard-earned assets.

Making plans for the distribution stage involves deciding where you'll live in retirement, whether you'll travel, your proposed leisure activities, and more decisions that will affect your spending during your golden years.

Along with these aspects, it is important to consider the RMD that applies to most retirement accounts. Essentially, the IRS requires you to withdraw a specific sum from your qualified retirement accounts once you attain a certain age. That age used to be 70 1/2 but it is now 72.

Why does the IRS require you to start taking your money out?

It's simple - they want to make sure they get their tax. If this rule didn't exist, people could live off other income and never pay tax on their retirement investment gains. Then, that money could be left to family or friends as an inheritance without the IRS collecting any taxes from you.

Key Facts to Know About RMDs

Which types of accounts have RMDs?

Qualified retirement accounts such as IRAs, 401(k)s, 457 plans, and other tax-deferred retirement savings plans like a TSP, 403(b), TSA, SEP, or SIMPLE IRA plan require withdrawals in retirement.

When do I have to start taking distributions?

For most accounts, you must take your first distribution by April 1 of the year following the calendar year in which you reach age 72. If you retire after that age, you must take your first RMD from your 401(k), profit-sharing, 403(b), or other defined contribution plan by April 1 of the year following the calendar year in which you retire.

Every year after your start date, you are required to take your RMD by December 31. Remember, for Roth IRAs you do not have to take an RMD because you paid taxes before contributing. However, other types of Roth accounts do require RMDs, but you may be able to avoid them (for instance, by rolling your Roth 401(k) into your Roth IRA).

What happens if don't take my RMD?

The penalty for not taking a required minimum distribution, or if the distribution is not large enough, is a 50% tax on the amount not withdrawn in time.

How much money do I have to withdraw?

To calculate a specific RMD, you must divide your prior year's December 31st retirement account balance by a "distribution period" factor based on your age.

Here's an example to give you an idea of the math: Ann is 71 and will take her first RMD in the year following the year she turns 72. Her IRA balance toward the end of the preceding year was $100,000. Her "distribution period" factor is 27.4. Dividing $100,000 by 27.4 equals $3,649.63. This is the amount Ann is required to withdraw for her first RMD.

Learning about the "distribution phase" is just one aspect of preparing for your nest egg years.

Happy Investing 

Top 5 financial pitfalls to avoid in retirement

Top 5 financial pitfalls to avoid in retirement

 

The word retirement brings with it a lot of anxiety and worry. The biggest concern of those approaching retirement is creating a balance between the life they live now as compared to the life they want to live post-retirement. While the biggest mistake done is not planning for retirement and investing haphazardly; we have listed the top five financial pitfalls to avoid in retirement planning.

1. Underestimating the income needed post retirement

A majority of people have no clue about the approximate income they would need to live a financially independent life post retirement. A vague assumption is what people work around which if too high can be unachievable and if too low can lead to financial crisis later in life. Every individual has different needs and following any general rules can be misleading. Retirees tend to spend on different things and considering their lifestyle, the income needed post-retirement needs to be calculated. This can then translate into annual or monthly savings figures.

2. Underestimating Health Care Costs

This is usually an overlooked area of retirement planning. With medical insurance, people tend to overlook the rate of increase of premium every year and the ailments beyond the coverage of the policy can create a big hole in your pocket at an older age. Health care costs need to be thought over carefully to avoid unplanned expenses post retirement.

3. All eggs in one basket

Whether it is Employee Stock Options or sheer trust in a company, most people tend to accumulate large amounts of stocks of select companies with them. They choose not to diversify because they think that they know these companies well. This is a high-risk behavior and it can diminish other investment avenues. A balanced portfolio of equity and debt can help your investments yield potential returns.

4. Easily accessible funds – What if I need the money?

Retirement planning is effective when the saving starts at a young age. It is a long-term objective and during the course of life, various situations increase the chances of utilizing the saved funds. Hence, it is imperative that such investments should have a lock-in period or a penalty for withdrawing before the due date. This acts as a deterrent and helps curb the tendency to break investments regularly.

5. Lack of Analyze - Assess-Adapt method

The world is going through a socio-economic change; more now than ever before. Sticking to a long-term financial plan without analyzing it can lead to a faltered output. A change of job, city, birth of a child, change in markets and many such factors demand an alteration in the savings pattern. With the Analyze-Assess-Adapt approach, re-examining the retirement plan once every few years helps take into account the market and lifestyle changes and make the plan more relevant.

Financial independence post retirement is the fundamental objective of a retirement plan. Avoiding the above-mentioned mistakes can help you achieve your goals and walk into the last phase of your life with dignity and peace.

Happy Investing 

Central Government Employee? NPS or OPS?

Central Government Employee? NPS or OPS?

Modi govt says this on Pension to family after death

 

Central Government Employees Pension Rules: The Union government has said that the family members, or nominees, of a Central Government employee covered under National Pension System (NPS) would get benefits as per PFRDA (Exits & Withdrawals under NPS) Regulations, 2015, in the event of the death of a Government Servant. However, in the event of the death of a serving Central Government Employee covered by NPS, family pension is available to families of such Central Government Employees at the rate prescribed by CCS (Pension) Rules, 1972 or CCS (Extraordinary Pension Rules) as the case may be.

Union Minister of State for Finance Anurag Thakur told the Lok Sabha in a written reply to a query on Monday (March 16, 2020): "The family members/ nominees of a Central Government employee covered under NPS would get benefits in accordance with PFRDA (Exits & Withdrawals under NPS) Regulations, 2015, notified by PFRDA, in the event of the death of Government Servant. However, as informed by Department of Pension and Pensioners' Welfare, vide their Office Memorandum No. 38/41/06-P&PW (A) dated 5th May, 2009, in the event of death of a Central Government servant covered by the NPS, family pension is available to such families of such Central Government employees at the rate and manner prescribed in the CCS (Pension) Rules, 1972 or CCS (Extraordinary Pension) Rules as the case may be…"

 

The Family Pension is provided as per the following details:

1. Thakur said, "(i) Under the CCS (Pension) Rules, 1972, on death of a serving Central Government servant, family pension is payable to the family of the deceased Government servant at enhanced rate of 50 per cent of last pay drawn by the Government servant for a period of 10 years and thereafter family pension is payable to the family at the rate of 30 per cent of last pay."

2. As per CCS (Extraordinary Pension) Rules, in case of death "on account of an injury or disease attributable to performance of Government duty", higher family pension in the form of "Extraordinary family pension" is paid to the Central Government servant. The compensation for this purpose is provided depending on the circumstances:

• Category A: Death or disability in normal circumstances
• Category B: Death or disability due to a disease contracted in the performance of duty
• Category C: Death or disability due to an injury sustained in accidents in the performance of duty
• Category D: Death or disability that can be attributed to acts of violence by terrorists, anti-social elements etc.
• Category E: Death or disability because of attack by or action against extremists, enemy action, etc
  Under Category A, pension is provided as per point 1 mentioned above. While the rate of family pension in category B and C is 60 per cent or last pay and 100 per cent of last pay in case of category D and E.
   

Tax Saving: Earn the right to invest

Tax Saving: Earn the right to invest

 

The last quarter of the calendar year is the best.

It is one celebration after another. Dussehra, Diwali, Christmas, New Year, the wedding season, and a respite from the scorching heat.

Come January, and reality hits.

It is the time for resolutions, goals and tax planning.

If you are reading this, the headline would have grabbed your attention.

And that is what I plan to focus on here – tax planning.

Without much ado, let me dive right in and explain what I mean by “earn the right to invest”.

All too often, it is a mad rush to meet our March 31 deadline. And in doing so, we make some grievous errors by padding our portfolio with investments that could be well avoided.

Here’s how to sidestep that landmine.

STEP I:

Don’t plunge into tax-saving investments without first checking tax-deductible expenses. Section 80C allows you to claim deductions on investments. You can claim a deduction of Rs 1.5 lakh of your total income under this section.

In simple terms, you can reduce up to Rs 1,50,000 from your total taxable income.

No one wants to pay more tax than is absolutely necessary. And rightly so. Hence the scramble to invest and look at the options available.

But investors must first ask themselves if they really need to invest to save tax.

Start by looking at payments. That’s right.

There are payments that are eligible for tax-saving deductions under Section 80C.

Life insurance premium

The annual premium paid for life insurance in the name of the taxpayer or the taxpayer’s wife and children is a tax-saving payment. But do note, the deduction is valid ONLY if the premium is less than 10% of the sum assured.

Tuition fee

The tuition fee paid for children is another you must consider. When the word tuition is used, it is the fee paid for a full-time course to any school, college, university or educational institute situated in India. It is not private, out-of-school tuition. Neither is it for fees paid abroad. The caveat being that it is limited to two children only.

Repayment of home loan

The third expense is the repayment of the principal amount of a home loan. This deduction is also applicable on stamp duty, registration fees and transfer expenses. The exclusion is interest payment, for which you can claim deductions under Sections 24(b), 80EE or 80EEA.

STEP II:

If you are a salaried employee, you must consider your provident fund. If you have not maxed the Rs 1.50 lakh limit with the above payments, then move on to check your provident fund contribution. Do this before you consider any other investment.

Contributions to the Employee Provident Fund, or EPF, are covered under the Section 80C limit.

This is a retirement benefit scheme that is available to salaried employees; 12% of basic salary is deducted by an employer and deposited in the EPF. Your provident fund contribution accumulated over the current financial year itself might add up to a sizeable amount.

This is all the more relevant in the case of Voluntary Provident Fund, or VPF. Here, the contributor decides on the amount of fixed contribution that is made towards the scheme on a monthly basis. Under the VPF, employees are allowed to make contributions towards their provident fund account on a voluntary basis.

The scheme does not include the mandatory 12% that the employee makes towards the EPF.

While technically, employees can contribute up to 100% of their basic salary towards the scheme, it is not mandatory for employers or employees to contribute to the VPF.

STEP III:

Now calculate if you have to invest to save tax. Once done with the above, chances are that you may not have to invest in Section 80C options to save tax.

But if you do, here are the list of investments that qualify.

ELSS: Equity Linked Savings Scheme, which is an equity mutual fund Fixed deposits:

Tax-saving 5-year bank deposits

PPF: Public Provident Fund NSC:

National Savings Certificate NPS: National Pension Scheme

ULIP: Unit Linked Insurance Plans

Sukanya Samriddhi Yojana: This is strictly for the girl child

SSSC: Senior Citizens Saving Scheme

Just be aware Blindly investing in any of the above simply because it has an option under Section 80C is unwise.

If you choose to do so, no one is stopping you, but do so knowing fully well what you are opting for.

I have no expenses under Section 80C (no life insurance policy since I have no dependents, no children’s education fees, and I am not servicing a home loan).

Yet, irrespective of my contribution to the EPF, I have made a conscious choice to invest in PPF up to the maximum limit of Rs 1,50,000 every single year.

Simply because it fits in with my overall risk profile and asset allocation.

Make holistic calls. It pays off in the long-run.

A slipshod planning will work against you.

Happy Investing

PPF: How to get the best out of it

PPF: How to get the best out of it

 

The Public Provident Fund, or PPF, is a government backed small-saving scheme. Though started in 1968 with the objective of providing social security during retirement to workers in the unorganized sector and for self-employed individuals, it has become a very popular tax-saving instrument.


The Return


The return is guaranteed (assured return) but keeps changing (flexible). By that I mean, you are promised a fixed return every year, though the exact figure fluctuates.


Once upon a time it returned an enticing 12% p.a. to gradually taper down to 7.9% p.a., where it currently resides.


There are spurts - at one time it moved from 8% p.a. to 8.8% p.a. The interest is compounded annually and credited to the account on March 31 every year.


However, the rates are fixed every quarter. It is not an ad-hoc quarterly adjustment, but benchmarked against the 10-year government bond yield. This periodic exercise is to keep it aligned with the current interest rate scenario.


Here’s another twist; the interest is calculated on a monthly basis though credited into the account at the very last day of the financial year. Interest becomes payable for that month ONLY if the deposit is made before the fifth of that month.


Interest rate is compounded annually. Interest rate is reset every quarter.




The Tenure


Theoretically, the PPF comes with a lock-in period of 15 years.


Technically, it is 16 years.


The maturity date is not calculated from the date of the opening of account. Instead, the date of calculation of maturity is taken from the end of the financial year in which the deposit was made, irrespective of the month or date in which the account was opened.


Let's say you made your first contribution on August 26, 2013. The lock-in period of 15 years will be calculated from the March 31, 2014, and the year of maturity will be April 1, 2029. Even if you make your first contribution on March 1, 2014, the lock-in period of 15 years will be calculated from March 31, 2014, and the year of maturity will be April 1, 2029.




The Tax


The lure of this investment is the safety and the triple tax break - EEE.


EEE is an acronym for Exempt, Exempt, Exempt. Your investment is allowed for a deduction under Section 80C up to Rs 1.5 lakh.


So, you don’t have to pay tax on part of the income that equals the invested amount. You don’t have to pay any tax on the returns earned during the accumulation phase. Your income from the investment would be tax-free in your hands at the time of withdrawal.




How to get the best out of the account


Position your PPF account as a retirement savings tool. Or, if you have just started an account and have a newborn, you can position it as a savings towards your child’s higher education.


Whatever be the goal, have a long-term perspective in mind.


You can decide how much to invest in the account every year. The minimum being Rs 500 and the maximum being the limit under Section 80C – Rs 1.50 lakh.


If it fits your asset allocation and long-term goals, deposit the entire amount (Rs 1.5 lakh) every year. And do so in the very first month of the financial year – April. This will help you get the best out of it.




PPF works on the principle of compounding.


Let’s say you invest Rs 1.5 lakh every single year in April and do so for 15 years.


This is what it is will look like:


Investment: Rs 22,50,000 (deduction under Section 80C)


Interest: Rs 21, 10, 517 (tax free)


Maturity: Rs 43,60,517 (tax free)


This lump-sum is tax free.


The above calculation was done @7.9% per annum.


If you cannot afford to put in a huge amount at one go, you have the option of a maximum 12 installments, each requiring a minimum of Rs 500. Do deposit it before the fifth of the month, as explained earlier.


Opt for it once you have your entire asset allocation in place.






Happy investing

No more booking of Indian Railways train tickets through private agents?

No more booking of Indian Railways train tickets through private agents?

This big step being considered

 ’Soon, the practice of booking Indian Railways train tickets through private vendors may stop! The Modi government is considering a move to bar private vendors and agents from booking IRCTC train tickets for passengers, according to a PTI report.

Recently, while addressing the demand for grants of the Railway Ministry, Piyush Goyal spoke about his ministry’s crackdown on touts, including arrests.

The Railway Minister further asserted that private agents are no longer required when most of the passengers can book their train tickets on mobile phones. Those passengers who need help with booking their train tickets can visit the common service centres, which are run by the government, Goyal said.

According to the minister, the touts, using certain software, used to book train tickets in large numbers within moments of their availability. The Railway Ministry has taken action against them, he added. Recently, Goyal in a written reply to a question in the parliament, said that several steps have been taken by the national transporter to prevent such activities of unscrupulous elements including touts, which are as follows:

• IRCTC, the e-ticketing arm of Indian Railways, has restricted Tatkal ticket bookings to only two tickets per user between 1000-1200 hours.
• Random Security Question has been introduced by IRCTC for booking of Tatkal tickets.
• The retail service providers have also been restricted to booking only one Tatkal ticket per train per day.
• Only one IRCTC User ID can be created by a person on a given email ID and mobile number.
• Only six tickets can be booked by a user in a month. However, this has been increased to 12 tickets per month, only if the user has linked his/her IRCTC user ID with Aadhaar number, and if at least one of the passengers in the passenger list is verifiable through Aadhaar.
• In one user login session, the booking has been restricted to only one ticket except for return or onward journey between 0800-1200 hours.
• Dynamic CAPTCHA has been introduced at registration, login and booking page to check fraudulent booking through automation software.
• Now, the minimum time required to enter passenger details is checked by IRCTC. Also, at the time of e-ticket booking, display of CAPTCHA has been provided.
• The IRCTC authorized agents have been restricted to book train tickets during the first 15 minutes of opening of Tatkal booking as well as Advance Reservation Period booking.
• The RPF is conducting regular drives against persons/agencies found involved in unauthorized railway ticket procuring and supplying.
• To detect illegal e-ticketing cases with follow up action, PRABAL query-based application is being used for verification of IRCTC IDs. 

Want To Retire Early? Learn the Intelligent Investing Secret

Want To Retire Early? Learn the Intelligent Investing Secret 

 

Accomplishing the financial cushion to retire early is a fantasy for most. Bringing the fantasy to reality is not as difficult as it sounds. The key is straightforward: Save significantly more every month. Sounds simple, correct? One moment.

The typical rule of thumb given by financial planners is to have a goal of saving up to 20% of total earnings. But if you want to retire when you're younger, that percentage will probably need to be more like 40% to 50% of your income. Of course, that's not so simple since a big part of your paycheck goes to day-to-day, necessary expenses. So if you want to save that much, you need to make some serious lifestyle adjustments. It requires making changes, but it's doable.

This concept of intensive saving for an early retirement has spawned a movement called FIRE (Financial Independence, Retire Early). Followers of FIRE strive to save up to three-quarters of their income, and make other adjustments too: live in small homes, walk to work each day, practice strict diet plans, and more. Even if this lifestyle may sound a bit unreasonable, the ideas behind it are worth considering.

To start, stick with the essentials of long-term growth investing: Build a diversified portfolio of stocks with exposure to various styles, sizes, sectors, and regions.

To speed up the retirement investment cycle, you can build a portfolio structured with more risk - and the potential for higher returns. It should in any case be adequately diversified to safeguard against sharper than normal market downturns that can be hard to recuperate from and that can ruin any opportunity to achieve your early retirement goal. There are various strategies to diversify a portfolio, and how you do so should be guided by your age, your risk appetite, your growth and income needs, and your long-term objectives.

Once you have accelerated your savings and put an ongoing plan in place, invest your savings into your portfolio as soon as possible. Don't try to time the market. Leave your portfolio alone, and let the compounding nature of the markets do its magic to help grow your retirement nest egg exponentially over time.

Astute investors pick retirement growth stocks with low beta, strong earnings estimates, positive sales growth, and expected future growth.

Whether you're planning to retire early or not, don't let investing mistakes derail your plans.

Happy Investing

Top 5 tax saving options for salaried 2019-20

Top 5 tax saving options for salaried 2019-20

 

 

’It is important for a salaried employee to choose tax-saving investments carefully.

There are five popular tax-saving investments that one may choose from-EPF, PPF, tax-saving FDs, NPS and ELSS.

Among these five tax-saving investments, EPF, PPF and tax-saving FDs are debt investments carrying a fixed rate of interest. While EPF, a mandatory investment for salaried, carries the highest interest rate, PPF is a 15-year investment option that also offers tax-free interest.

PPF can be extended in a block of 5 years and hence can supplement EPF for one’s long-term goals.

For goals that are around 5 years and if you are looking for a fixed return, tax-saving FDs may be suitable for the salaried.

One may also consider NSC as it has a 5-year tenure, and can be bought just by making a visit to your nearby post office.

Here are some important features of the top 5 tax-saving options for salaried employees:

1. Employee provident fund (EPF)

For the year 2018-19, the interest rate on employees’ provident fund (EPF) balance is 8.65 per cent. The contributions enjoy tax benefit under section 80C while the growth is tax-exempt and even the maturity amount on retirement or on withdrawal after a continuous service of five years is tax-free. For taxation purpose, employee provident fund enjoys E-E-E tax status. As an employee, one can increase the PF contribution to 100 per cent of basic salary, from the mandatory 12 per cent limit. In such a case, it will be called voluntary provident fund and will carry similar tax benefits as EPF.

2. Public Provident Fund (PPF)

PPF account can be opened with Rs 500, while the maximum one can invest is Rs 1.5 lakh in one financial year. As a parent one can open another PPF account in the name of a minor child but the maximum taken together cannot exceed Rs 1.5 lakh. To get the interest amount for the entire month, make sure you invest on or before 5th of the month. Currently, for the quarter January to March 2020, the interest rate on PPF is 7.9 per cent compounded annually.

3. Tax saving mutual funds – ELSS

ELSS is the tax saving mutual fund scheme available with all mutual fund houses. ELSS is the only tax saving option that has the shortest lock-in period of three years. Your investment in ELSS will help you get tax benefit under section 80C and will be primarily invested in the equity market. The ELSS funds are varied with different proportion of allocation in several industries and across market capitalisation.

4. National Pension System (NPS)

NPS is a retirement-focused scheme with maturity at age 60. Among the fund options available in NPS, the maximum one can invest in an equity fund is 75 per cent of contribution while the balance can be put in debt funds. The tax benefit is available Section 80CCD(1) wherein the deduction can not exceed an amount equal to 10 per cent of the Basic Salary. Over and above Section 80CCD(1), one can additionally invest up to Rs 50,000 under Section 80CCD(1B). At age 60, one can withdraw a maximum of 60 per cent of corpus which is tax-exempt while on the balance one starts getting pension.

5. Tax saving bank fixed deposit

The tax saving FD is available with banks and carries a fixed interest rate. The tenure is 5 years and does not allow any partial withdrawal before the lock-in period ends. One can open tax saving FD online in the bank where one holds the account. The interest rate is similar to the rate of interest offered on the bank’s regular 5-year tenure FD.

What to do Tax saving exercise should not be an isolated activity. Do not invest merely to save tax. Rather, link your investment in tax saver to your long term goals. Based on your risk profile, see how ELSS fits in your tax planning and ideally make higher use of it. For a salaried individual, while EPF is an involuntary saving, thereafter, diversify across ELSS, PPF and if there are medium-term goals, choose between bank tax-saving FD or NSC.

Happy Investing