Page 1 Northeast Planning Associates, Inc.
This reference guide is created for Northeast Planning Associates
Advisors and Staff use only. Use with the General Public is prohibited.
2016
QuickQuickQuick
Reference Reference Reference
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Page 2 Quick Reference Guide Page 2 Quick Reference Guide
© 2016 Northeast Planning Associates, Inc.
All rights reserved.
This reference guide is created for
Northeast Planning Associates Advisors and Staff use only.
Use with the General Public is prohibited.
Page 3 Northeast Planning Associates, Inc. Page 3 Northeast Planning Associates, Inc.
Page 4 Quick Reference Guide
Table of Contents
NPA Extensions 6
Section I: 2016 Updated Tax Information
Tax Law Review & Medicare Premiums 9
Social Security Claiming Strategy Changes 10
Employee Benefit Limits 11
IRA Contribution Limits 12
2016 Income and Social Security Taxes 13
2016 Gift & Estate Tax Information 14
2016 Gift Tax Exclusions, SS Taxation and Offset Provisions 15
Tax-Qualified Long-Term Care Insurance Summary 16
Medicare Tax on Net Investment Income & Tax Free Policy Exchanges 17
Section II: Government Benefits
When to Take Social Security Benefits 21
Effect of Retirement Age on Social Security Benefits 23
How Work Affects Social Security Benefits 24
Useful Social Security Information 25
SS Retirement & Survivor Benefit Tables 26
Medicare 28
Medicaid Provisions 31
Section III: IRAs, Qualified Plans & Employee Benefits
Qualified Plan/IRA Rollover Options 37
Getting through the IRA Maze - 2016 38
Required Minimum Distributions 41
Uniform Lifetime Table to calculate RMDs 43
Single Lifetime Table to calculate RMDs 44
Retirement Plan Distributions Prior to 59 1/2 45
Taxation of Roth IRA Distributions 47
Back Door Roth IRA Contribution 48
Page 5 Northeast Planning Associates, Inc.
Table of Contents
Roth IRA Conversion Factors to Consider 49
Roth Conversion Decision Tree 50
Trusteed IRA 51
Incentive and NQ Stock Options 51
Comparative Features FSA, HRA, HSA 52
Section IV: Education Planning
Qualified Tuition Savings Plans (529) 57
Superfunding a 529 & Internet Resources 59
Section V: Estate & Charitable Gifting
Estate & Gift Tax Information 63
Transfer on Death Titling 64
Charitable Remainder Trusts 65
Charitable Lead Trusts 66
Section VI: Financial Concepts
CPI & Inflation Tables 71
Tax Exempt vs Taxable Income 73
Financial Destinations - Rates of Return for Each Time Period 74
Accumulating One Million Dollars 75
Savings Early vs. Saving Late 76
Bond Maturity vs. Duration 77
Rule of 72 & Rule of 115 & 2015 Market Results 78
Sustainable Withdrawal Rates 79
Notes 80
The Planning Center 82
Page 6 Quick Reference Guide
Receptionist 200
CEO’s Office—Ed Hiers 300
President’s Office—Ben Hiers 234
Assistant to CEO/President—Ruth Etelman-Smith 225
Corporate Development/
Integrated Partners—Louise Brassard 211
The Planning Center—Matt Eaton
Marie Smith
Andrew Doughty
227
301
228
Virtual Assistant—Deb Dussault 236
Technology—Joe Lemire 248
Marketing—Bryan Harms
Megan Ayers
246
266
Compliance/Operations—Mike Hartman
Claudia Vecchi
Jocelyn Lockwood
212
208
240
Accounting—Rachel Lessard 232
Northeast Planning Associates, Inc.
43 Constitution Dr.
Bedford, NH 03110
(603) 471-0900 - FAX (603) 471-0471
Extension Listing
Page 9 Northeast Planning Associates, Inc.
The Protecting Americans from Tax Hikes (PATH) Act of 2015 made permanent
many of the tax extenders and extended most others at least through 2016:
The QCD is still capped at $100,000. Those who already took their RMD for 2015 will not be
able to undo it to complete a QCD for this year. It is still more beneficial from a tax perspective
to donate appreciated assets to charity than a QCD.
The Schoolteacher Expense Deduction was also enhanced and made permanent. Elementary and
secondary school teachers are eligible for an above-the-line deduction of schoolteacher expenses
up to $250/year. This amount will be indexed by inflation and starting in 2016 will include pro-
fessional development expenses as well as classroom expenses.
Previously, 529 plans were required to be aggregated together in order to determine the amount
of each distribution that would be return of principal or gain. Under the new rules, each 529
account distribution is taxed based on only gains in that account.
2016 Medicare Premiums - 15% Increase Due to Bipartisan Budget Act of 2015
Most Medicare beneficiaries are guaranteed that their benefits will not decrease due to the
“hold harmless” provision. As a result of the Bipartisan Budget Act of 2015, Medicare
beneficiaries who are not held harmless will see an increase in Medicare Part B premiums
limited to 15%. Below is a table summarizing the new premiums and MAGI ranges:
Tax Law Review
Tax Extenders Under The PATH Act of 2015
Made
Permanent
Qualified
Charitable
Distributions
from IRA to
Charity
State and Local
Sales Tax
Deduction
American
Opportunity
Tax Credit
Enhanced
Child Tax
Credit
Section 179
Expensing
(with inflation
indexing)
Extended
Through 2016
Extension of
Discharged
Mortgage Debt
on Short Sale
Deductibility of
Mortgage
Insurance
Premiums
Above-The-
Line Education
Deduction for
Qualified
Tuition & Fees
50% Bonus
Depreciation
(through
2019)
Other Notable
Changes
Expansion of 529
Qualified
Expenses to
Include
Computer &
Related
Expenses
Elimination of
529
Aggregation
Rule
Elimination of
529 ABLE
Account In-
State
Residency
Requirement
Modified Adjusted Gross Income Medicare Part B Premium
Single Married Filing Joint 2015 2016 ($3/mo surcharge)
$85,000 or less $170,000 or less $104.90 $104.90 (held harmless)
$120.00 (not held harmless)
$85,001 - $107,000 $170,001 - $214,000 $146.90 $171.00
$107,001 - $160,000 $214,001 - $320,000 $209.80 $243.00
$160,001 - $214,000 $320,001 - $428,000 $272.70 $315.00
$214,001 & above $428,001 & above $335.70 $387.00
Page 10 Quick Reference Guide
Changes to Availability of Social Security
Claiming Strategies
One of the major impacts of the Bipartisan Budget Act of 2015 was the closing of
“unintended loopholes” in Social Security by removing the popular claiming strate-
gies such as File and Suspend and Restricting an Application has thrown a wrench
in many advisors’ plans for their clients.
These changes do not affect those who have already elected these claiming strate-
gies.
Born 4/30/1950
or earlier
Born 1/1/1954
or earlier Born 1/2/1954 or later
File &
Suspend
Restricted
Application
File &
Suspend
Restricted
Application
File &
Suspend
Restricted
Application
Currently
Married
Still availa-
ble at FRA;
must file by
4/29/16
Still available
at FRA
Available
to those
age 66 by
4/30/16
Still available
at FRA
Not Eligi-
ble
Not Eligible
Unmarried
Divorced
Spouse
N/A Still available
at FRA
N/A Still available
at FRA
N/A Not Eligible
Parents with
dependents
Still availa-
ble at FRA;
must file by
4/29/16
N/A Not Eligi-
ble, but
can still
start/stop
N/A Not Eligi-
ble, but
can still
start/stop
N/A
Surviving
Spouse New rules don’t apply. New rules don’t apply. New rules don’t apply.
Individual
Must be at
FRA and
complete
file and
suspend by
4/29/16 for
future
reinstate-
ment
N/A Must be at
FRA and
complete
file and
suspend
by 4/29/16
for future
reinstate-
ment
N/A No future
reinstate-
ment
available
N/A
Page 11 Northeast Planning Associates, Inc.
Employee Benefit Limits
Defined Benefit Plans $210,000
Defined Contributions $53,000 or 100% of pay
Elective Deferral Limit for
401(k) (incl. Roth) and 403(b) plans $18,000
Catch-up for 401(k) and 403(b) plans $ 6,000
SIMPLE IRAs and SIMPLE 401(k) plans $12,500
Catch-up for SIMPLE IRAs and
SIMPLE 401(k) plans $ 3,000
Elective Deferral for 457 Plans $18,000
Catch up for 457 Plans: $ 6,000
SEP Contributions: 25% of Covered Comp up to
maximum of $53,000
Minimum Compensation for SEPs $ 600
Maximum Compensations for SEPs,
VEBAs, TSAs, Qualified Plans $265,000
Highly Compensated Employee Comp $120,000
Key Employee Compensation $170,000
Page 12 Quick Reference Guide
Contributions Limits—Traditional & Roth IRA
*Taxpayers age 50 and over are eligible to make catch-up contributions
AGI Phase-Out Range for Contributions to Roth IRAs
Married Filing Jointly $184,000—$194,000
Single $117,000—$132,000
Traditional IRA Deductibility Rules
Covered by an employer sponsored plan, phase-out for deduction is
Married Filing Jointly $98,000—$118,000
Single $61,000—$71,000
Not covered by an employer sponsored plan, but filing a joint return with a
spouse who is covered by one, phase-out for deduction is $184,000—$194,000
Single individuals not covered by a qualified plan and married couples where
neither is participating in a qualified plan, deduction of up to the lesser of $6,000
(plus Catch Up) or 100% of earned income allowed without regard to AGI
Kiddie Tax
The amount of unearned income a child can take home without being
subject to federal income tax is $1,050. The next $1,050 of unearned
income is taxed at the child’s tax rate, with income over $2,100 being
taxed at the parent’s marginal rate.
2015 2016
Regular $5,500 $5,500
Catch-Up* $1,000 $1,000
Social Security/Medicare Taxes
OASDI Wage Base: $118,500
OASDI Tax: 6.2%
Medicare Wage Base: Unlimited
Medicare Tax: 1.45%
Additional Medicare Tax .90%
Single $200,000+, Married $250,000+
Page 13 Northeast Planning Associates, Inc.
2016 TAX YEAR INFORMATION
Federal Income Taxes
Married Filing Jointly & Surviving Spouse
Single Individuals
STANDARD DEDUCTION Joint $12,600 Single $6,300
PERSONAL EXEMPTION $4,050
Exemptions & Deductions Phase-Out Ranges
Joint Single
Itemized Deductions $311,300 $259,400
Personal Exemptions $311,300—$433,800 $259,400—$381,900
Taxable Income Tax on Column 1I Tax on Excess Gross Income* Capital Gains
$0 $0 10% $20,700 0%
18,550 1,855.00 15% $39,150 0%
75,300 10,367.50 25% $96,000 15%
151,900 29,517.50 28% $172,600 15%
231,450 51,791.50 33% $252,150 15%
413,350 111,818.50 35% $434,050 18.8%**
466,950 130,578.50 39.60% $487,650 23.8%**
Taxable Income Tax on Column 1I Tax on Excess Gross Income* Capital Gains
$0 $0 10% $10,350 0%
9,275 $927.50 15% $19,625 0%
37,650 $5,183.75 25% $48,000 15%
91,150 $18,558.75 28% $101,500 15%
190,150 $46,278.75 33% $200,500 15%
413,350 $119,934.75 35% $423,700 18.8%**
415,050 $120,579.75 39.6 $425,400 23.8%**
*Gross Income prior to standard deduction(s) and personal exemption(s).
**Includes additional Medicare tax on Net Investment Income above $250,000 (MFJ)/$200,000 (Single).
Page 14 Quick Reference Guide
2016 Estate & Gift Tax Table
(also found in Estate & Charitable Section - pg. 63)
Taxable Gift Taxable Gift Tax on Rate on
From To Col. 1 Excess
$ 0 $ 10,000 $ 0 18%
10,000 20,000 1,800 20%
20,000 40,000 3,800 22%
40,000 60,000 8,200 24%
60,000 80,000 13,000 26%
80,000 100,000 18,200 28%
100,000 150,000 23,800 30%
150,000 250,000 38,800 32%
250,000 500,000 70,800 34%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000 5,430,000 345,800 40%
5,450,000 —— 2,155,800 40%
Estate Tax Exclusion Amount
Year Exclusion Amount Tax Credit
2016 5,450,000 $2,155,800
Portability between spouses is now permanent. (“DSUE” = Deceased
Spousal Unused Exclusion). Basis is stepped up at death.
Why consider Marital or CST trusts?
1. DSUEA amount is NOT indexed after the first death.
2. CST will shelter future appreciation.
3. Marital trust can irrevocably name beneficiaries.
4. Trust assets are generally sheltered from creditors and are kept
private.
Page 15 Northeast Planning Associates, Inc.
2016 Gift Tax Credit
Exclusion Equivalent
$5,450,000
Annual Exclusion for Gifts
$14,000 per donee
Annual Exclusion for Gifts to Non-Citizen Spouse
$148,000
Social Security Benefits
Maximum SSI Benefit: $2,787/month
Earnings Limits for under Full Retirement
Age -Lose $1 for every $2 earned over: $15,720/year
Over age Full Retirement Age: No Limit
Taxation of Social Security Benefits
Married Filing Jointly Single
0% Taxable Up to $32,000 MAGI* Up to $25,000 MAGI*
50% Taxable $32,001—$44,000 MAGI* $25,001—$34,000 MAGI*
85% Taxable Above $44,000 MAGI* Above $34,000 MAGI*
*MAGI equals Adjusted Gross Income plus any tax exempt interest earned and 1/2 of
Social Security Benefit
Social Security Exempt Pension Offset
Personal Social
Security
Collecting Spouse
Benefit
Collecting Surviving
Spouse Benefit
Person
Receiving
Exempt
Pension
Approximately
50% reduction
in SSI
67% of exempt
pension subtracted
from SSI eligibility
67% of exempt pen-
sion subtracted from
SSI eligibility
Page 16 Quick Reference Guide
Type of
Taxpayer Deduction of Premiums
Taxation of
Benefits
Individual tax-
payer who does
NOT itemize
deductions
No LTC insurance premium deduction available
Reimburse-
ment: benefits
are not included in
income.
Individual tax-
payer who item-
izes deductions
LTC insurance treated as accident and health insurance Deduction is limited to the lesser of actual premium paid or
eligible LTC premium amounts Eligible LTC premium in 2016: Attainted age Limit 40 or less $ 390 41-50 $ 730 51-60 $1,460 61-70 $3,900 71 and older $4,870 Medical expense deduction is allowable to extent that such ex-
penses (including payment of eligible LTC premium) exceed 10%
of AGI.
Per diem
(indemnity):
benefits are not
included in income
except those
amounts which
exceed the greater
of: - Total qualified
LTC expenses - $330/day
MSA & HSA Eligible LTC insurance premium is considered a qualified medical
expense
Employee (non-owner)
LTC premium paid by employee: - Deductible be employee who itemizes (subject to limitations
above) - May NOT be paid through a cafeteria plan - May NOT be paid through an FSA or similar
arrangement LTC premium paid by employer:
- Employer-provided LTC insurance is treated as an accident and
health plan - Deductible by employer (subject to reasonable compensation) - Total (not eligible) LTC insurance premium is excluded from
employee’s income
Non-forfeiture:
benefits (return of
premium) are: - Available only
upon total surren-
der or death - May not be
borrowed or
pledged - Included in gross
income to extent
of any deduction
of exclusion al-
lowed with re-
spect to premium
C-Corporation
(shareholder/ employee w/ W-2)
Treated as “Employee” (see above)
Sole
Proprietor S-Corporation
(greater than 2%
shareholder
with W-2) Partnership (any %)
Eligible for Self-Employed health insurance deduction,
which is taken “above the line” Line 29 of IRS Form 1040 Limited to lesser of actual LTC premium paid or eligible
LTC premium (see “Individual who itemizes” section)
Deduction is NOT limited to 10% AGI threshold. Limited
Liability Cor-
poration
(LLC)
Tax-Qualified Long-Term Care Insurance Summary
Page 17 Northeast Planning Associates, Inc.
Medicare Tax on Net Investment Income
The tax is 3.8% on the lesser of Net Investment Income or NII LESS the threshold
amount. See the following table for an illustration:
The following should be considered as planning techniques to potentially reduce the im-
pact of this tax:
Targeting investments with losses will directly offset NII.
Reducing AGI will also reduce the tax, if doing so would reduce income below the
threshold amount.
Deductible contributions to IRAs and deferrals to 401(k)
plans should be considered.
Giving appreciated securities to charity as any gains would
not be included on the tax return.
If a Sub Chapter S-Corp or rental property, changing income
received from passive to active would not subject such income
to the tax. Note: Doing so will subject income to FICA.
Net Investment Income
Filing Status Married Filing Jointly Single
Threshold $250,000 $200,000
Example:
Wages $225,000 $300,000 $175,000 $250,000
Net Investment Income $75,000 $75,000 $60,000 $60,000
Total $300,000 $375,000 $235,000 $310,000
Amount Over Threshold $50,000 $125,000 $35,000 $110,000
Lesser of NII or Amount Over $50,000 $75,000 $35,000 $60,000
Tax at 3.8% $1,900 $2,850 $1,330 $2,280
Tax-Free Policy Exchanges under IRS Code Section 1035
Life insurance policies and annuities must have the same owner and insured (cannot
go from single life policy to joint life policy).
Policy funds should transfer directly between insurance companies.
If cash or property is included as part of the exchange, any gain will be recognized up
to that amount.
If a tax free withdrawal is taken from a life policy which is subsequently exchanged
for a new life policy it may be considered a “step” transaction with gain recognized
to the extent of the withdrawal.
Cost basis should carry over from the old policy to the new .
Type of New Policy/Contract
Existing Policy/Contract
Type
To Life
Insurance
To an Endow-
ment Contract
To a Fixed or
Variable Annuity
To a Qualified
LTC Contract
Life Insurance Yes Yes Yes Yes
Endowment Contract No Yes1 Yes Yes
Annuity Contract No No Yes Yes
Qualified LTC Contract No No No Yes
Page 18 Quick Reference Guide
NOTES
Page 21 Northeast Planning Associates, Inc.
When to Take Social Security Retirement Benefits Social Security is administered by the Social Security Administration and provides
old age (retirement), survivors, and disability benefits (OASDI). The most widely
used aspect of this program is the retirement benefits – nine out of ten individuals
over age 65 receive benefits. Research by the Federal government indicates that
Social Security retirement benefits typically make up more than one-third of the
income of Americans age 65 or older.1 Thus, the decision as to when to begin to
take Social Security retirement benefits is an important one.
The question is made a little easier to answer if you separate when you want to
retire from when you want to begin receiving Social Security retirement benefits;
these two events don’t necessarily have to occur at the same time. An under-
standing of how your benefits are calculated and what happens if you continue to
work after beginning to receive benefits, is also important.
“Full” Retirement Age – “Full” Benefits
Full Retirement Age (FRA), the age at which “full” benefits – 100% of an individual’s
Primary Insurance Amount2 (PIA) – are available, is set at age 65 for those born in
1937 or earlier. For those born 1938 or later, FRA gradually increases until it
reaches age 67 for those born in 1960 or later.
Early Retirement – Reduced Benefits
If fully insured, an individual can claim permanently reduced retirement benefit as
early as the first full month of age 62. The amount of the reduction varies with the
year of birth. For example, an individual born in 1943 (FRA = 66) who began re-
ceiving benefits at age 62 had his or her retirement benefit reduced to 75% of what
it would have been had they chosen to wait until FRA. However, for a worker
born in 1962, for whom FRA is age 67, choosing to receive retirement benefits at
age 62 results in an initial benefit reduced to 70% of what it would have been had
the individual waited to NRA.
Delay Retirement – A Bigger Benefit
For those continuing to work past their FRA or those with adequate retirement
income outside of Social Security, delaying receipt of retirement benefits may be
appropriate. What happens when you decide to wait and take your retirement
benefits later than your FRA is you get paid for waiting, in the form of a larger
retirement benefit. For each year beyond your FRA that you delay receiving bene-
fits – up to age 70 – your benefit is increased by 8%.
File & Suspend
A married individual who is at least FRA, can elect to file for benefits but suspend
collecting them until a later date, enabling his or her spouse to collect spousal ben-
efits while earning delayed retirement credits. Unmarried divorced ex-spouses
must only wait until the retiree is age 62 in order to begin receiving benefits.
Due to new rules, a spouse or dependent of a worker born after 4/30/1950
may only receive a benefit based on the worker’s benefit if the worker has
filed and is receiving a benefit.
Page 22 Quick Reference Guide
Phase-In (Restricted Application)
One spouse starts receiving income before their Full Retirement Age while the
other spouse starts receiving their benefit at their FRA. Only available to those
born 1/1/1954 or earlier.
Example of Phase-In: This strategy provided benefits as early as 62, with the ability
to receive higher benefits later in life. At age 62, the lower-earning spouse collects
his/her individual benefit, which is reduced based on their date of birth and FRA. At
FRA the higher-earning spouse collects the spousal benefit only( filing a restricted
application) in order to delay his/her own benefit until age 70. At age 70, the higher
-earning spouse collects his/her own benefit and the lower-earning spouse receives
the spousal benefit.
File and Suspend - Single
Only available to those born 4/30/1950 or earlier.
The benefit of filing and suspending individual retirement benefits is that it can be
used as a proactive planning strategy, allowing the individual to effectively “undo”
their decision to delay, and reinstate benefits back to the date they chose to file
and suspend (e.g. full retirement age). This strategy is great for those who are un-
sure whether or not delaying is the right choice, or concerned about unexpected
healthcare or other expenses.
Example: Bob is at his full retirement age (66) and is single. He is currently eligible
for Social Security benefits in the amount of $2,000/month. Sadly after 2 years, Bob
is diagnosed with a serious disease that will shorten his life span significantly, mak-
ing it unlikely he will reach the breakeven point, which makes the strategy of delay-
ing the credits no longer beneficial.
Without using the “file and suspend” strategy, he has 2 options if he wishes to
change his benefit:
1. Begin receiving payments immediately - increased due to two years of
8% Delayed Retirement Credits (DRCs).
2. File for retroactive benefits back to age 67½ (due to maximum of 6
months imposed by IRS), receiving a monthly benefit going forward of
$2,240 due to the 6 months of DRCs being undone and a 6‐month lump
sum of $13,440 ($2,240 x 6).
If Bob had used the “file and suspend” strategy, he would have a third option:
3. Reinstate his suspended benefits back to his age 66, which would re-
sult in a lump sum of $48,000 ($2,000 FRA benefit x 24 months) and
payments going forward would equal $2,000 with no DRC increases.
When Is Best to Receive Retirement Benefits?
One way to answer this question is to perform a break-even analysis which esti-
mates the age at which the total value of higher benefits (from delaying retirement)
is greater than the total value of lower benefits (from starting retirement early).
Those expecting to live longer than the break-even age would likely benefit from
delaying the start of Social Security retirement benefits. For those in poor health,
or if family members have historically had short life spans, it is likely of greater
benefit to begin benefits early.
Page 23 Northeast Planning Associates, Inc.
The Effect of Early or Delayed Retirement on Social Security
Retirement Benefits
The table below shows the effect of early or delayed retirement on an individu-
al’s retirement benefit, depending on their year of birth.
Source: Social Security Administration. 1The PIA is calculated by the Social Security Administration based on a person’s lifetime earnings rec-
ord.
Retirement Benefit as a Percentage of the Primary Insurance Amount
at Various Ages1
Year of
Birth
Full Re-
tirement
Age (FRA)
Credit for
each year
of delayed
retire-
ment
after FRA
(Percent)
Benefit as a % of PIA at Age
62 63 64 65 66 67 70
1943-
1954 66 8 75 80 86 2/3 93 1/3 100 108 132
1955 66, 2mos 8 74 1/6 79 1/6 85 5/9 92 2/9 98 8/9 106 2/3 130 2/3
1956 66, 4mos 8 73 1/3 78 1/3 84 4/9 91 1/9 97 7/9 105 1/3 129 1/3
1957 66, 6mos 8 72 ½ 77 ½ 83 1/3 90 96 2/3 104 128
1958 66, 8mos 8 71 2/3 76 2/3 82 2/9 88 8/9 95 5/9 102 2/3 126 2/3
1959 66, 10mos 8 70 5/6 75 5/6 81 1/9 87 7/9 94 4/9 101 1/3 125 1/3
1960 and
later 67 8 70 75 80 86 2/3 93 1/3 100 124
Page 24 Quick Reference Guide
How Work Affects Social Security Benefits
If a Social Security recipient also works while receiving retirement benefits, some
of the benefits may be reduced if the income earned exceeds certain dollar limits.
However, the month an individual reaches Full Retirement Age, or FRA, Social
Security benefits are no longer reduced, regardless of the amount of income
earned.
Example (1): An individual begins receiving Social Security benefits at age 63 in
January 2016 with a benefit of $500/month. If the retiree works and earns
$25,480 during the year, he or she would have to give up $5,000 of Social Security
benefits ($1 for every $2 over the $15,480 limit), but would still receive $1,000.
Example (2): Assume an individual reaches FRA in November 2016. Also assume
the individual earns $51,696 during the year, with $44,400 of this amount being
receiving in the first 10 months of the year. The individual would give up $1,000
in benefit ($1 for every $3 earned above the $41,400 limit). Assuming Social Se-
curity retirement benefit of $500/month, the individual would still receive $4,000
out of the $5,000 for the first 10 months of the year. Full benefits of$500/month
would be received for November and December, after FRA is reached.
Age of Social
Security Benefits
Recipient
Annual Exempt Amount One Dollar of Benefits Lost for
Every Two or Three Dollars
Earned Over the Exempt
Amount 2015 2016
Under FRA $15,720 $15,720 Every Two Dollars
Year FRA
Reached $41,880 $41,880 Every Three Dollars
Month FRA
Reached No Limit No Limit No Loss of Benefits
Page 25 Northeast Planning Associates, Inc.
What Counts as Earnings? Any wages earned from work as an employee and any net earnings from self-
employment count as earnings. Wages include bonuses, commissions, fees and
earning from all types of work, whether or not covered by Social Security.
Income not counted as earnings include:
Investment income including stock dividends, interest from savings accounts,
income from annuities, limited partnership income and rental income from
real estate you own (unless counted as self-employment income).
Payments from IRAs or Keogh Plans.
Income from Social Security, pension, other retirement pay and Veterans
Administration Benefits.
Gifts or inheritances.
Royalties received after age 65 from patents or copyrights obtained before
that year.
Retirement payments received by a retired partner from a partnership, pro-
vided certain conditions are met.
Income from self-employment received in a year after the year a person be-
comes entitled to benefits. This refers to income which is not attributable to
services performed after the month of entitlement. This is only excluded
from gross income for the purposes of the earning test.
Social Security Information
SSA Reinstates Mailing of Paper Statements
In September 2014, the Social Security Administration resumed mailing paper
statements to those not enrolled in their online system. Statements will be mailed
in five year increments, beginning at 25 and continuing to 60. As before, it is possi-
ble to get an online estimate of your personal benefits (or direct your clients on
how to do so). In order to use the online estimator you will need: your social se-
curity number, mother’s maiden name, date of birth, state of birth and earnings for
the prior calendar year. Following is a link to the estimator: http://www.ssa.gov/
estimator/
Withdrawal of Social Security Application
An individual can start collecting benefits and then change his or her mind by filing
a “Request for Withdrawal of Application” form with the SSA. They will review
the request and, if it is granted, repayment of all of the payments received is re-
quired. There is no penalty or interest on the amount repaid. The SSA recently
restricted withdrawals to within 12 months of collecting benefits and will only al-
low one withdrawal per lifetime. The individual can then file for benefits at a later
date.
Page 26 Quick Reference Guide
Social Security Retirement Benefits
This table shows approximate monthly benefits at Full Retirement Age (FRA) for a
worker and spouse. It assumes that the worker has worked since age 22, is the
higher earner, and received annual wage increases. Values are shown in today’s
dollars. The spouse may qualify for higher retirement benefits based on his/her
own work record.
Monthly Benefits at Full Retirement Age
Present Annual Earnings
Age in
2016
Who Receives
Benefits
$35,000 $50,000 $65,000 $118,500+
66 Worker 1,283 1,633 1,984 2,639
Spouse 641 816 992 1,319
65 Worker 1,302 1,657 2,012 2,679
Spouse 651 828 1,006 1,339
64 Worker 1,322 1,683 2,044 2,723
Spouse 661 841 1,022 1,361
63 Worker 1,318 1,678 2,038 2,713
Spouse 659 839 1,019 1,356
55 Worker 1,380 1,759 2,138 2,830
Spouse 682 879 1,069 1,415
50 Worker 1,391 1,774 2,152 2,840
Spouse 695 887 1,076 1,420
45 Worker 1,402 1,790 2,161 2,849
Spouse 701 895 1,080 1,424
40 Worker 1,412 1,805 2,171 2,854
Spouse 706 902 1,085 1,427
Page 27 Northeast Planning Associates, Inc.
Social Security Survivor Benefits
This table shows approximate monthly survivor benefits payable to a family in
2016. Figures assume work from age 22 on. Survivor benefits are based on the
insured worker’s Primary Insurance Amount (PIA) on the date of death.
Monthly Survivor Benefits in 2016
Present Annual Earnings
Age in
2016
Who Receives
Benefits
$35,000 $50,000 $65,000 $118,500+
66 Spouse at FRA* 1,283 1,633 1,984 2,639
Spouse at 60 917 1,168 1,418 1,887
Child or Spouse
caring for child <16
962 1,225 1,488 1,979
Family Maximum 2,237 2,984 3,473 4,619
55 Spouse at FRA* 1,354 1,722 2,090 2,806
Spouse at age 60 968 1,231 1,494 2,006
Child or Spouse
caring for child <16
1,016 1,292 1,567 2,105
Family Maximum 2,351 3,152 3,658 4,912
40 Spouse at FRA* 1,356 1,724 2,092 2,833
Spouse at age 60 969 1,232 1,496 2,025
Child or Spouse
caring for child <16
1,017 1,293 1,569 2,125
Family Maximum 2,354 3,154 3,662 4,958
30 Spouse at FRA* 1,363 1,734 2,106 2,871
Spouse at age 60 974 1,240 1,505 2,052
Child or Spouse
caring for child <16
1,022 1,300 1,579 2,153
Family Maximum 2,373 3,168 3,685 5,025
*FRA (Full Retirement Age) ranging from age 65 to age 67 depending on year of birth
Page 28 Quick Reference Guide
Medicare
Medicare is a federal government program providing health insurance benefits to
qualifying individuals age 65 or older as well as certain disabled individuals under
age 65. The two most widely recognized Medicare programs are Part A, hospi-
tal insurance and Part B, medical insurance. Similar to traditional medical insur-
ance Part A and Part B represent “fee for service” coverage. A Medicare benefi-
ciary can go to any physician or health facility nationwide which accepts Medi-
care payments.
Premiums for Medicare Parts A and B are generally paid directly from Social
Security benefits although the Center for Medicare and Medicaid Services (CMS)
will bill the beneficiary directly if he or she is not yet receiving Social Security
benefits. Most Medicare beneficiaries do not pay a premium for Part A. Medi-
care Part B premium is based on the beneficiary’s modified adjusted gross in-
come as seen in the table below.
In a year where there is no COLA increase to Social Security benefits, those in
the $85,000 or less (single)/$170,000 or less (joint) MAGI brackets as part of the
“hold harmless” provision. This means that their Social Security benefit checks
will not decrease due to Medicare Part B premium increases. Those who are in
the higher MAGI ranges and those newly enrolling in Part B are not “held harm-
less” and in most circumstances must bear the entire brunt of the increase in
premiums, until Social Security COLA’s even out the distribution of Medicare
cost increases.
Late enrollment penalty: Individuals who don't sign up for Part B when they
are first eligible or drop Part B and then get it later, may have to pay a late
enrollment penalty for as long as they have Medicare. The monthly premium for
Part B may go up 10% for each full 12-month period that the individual could
have had Part B, but didn't sign up for it.
Modified Adjusted Gross Income Medicare Part B Premium
Single Married Filing Joint 2015 2016 ($3/mo surcharge)
$85,000 or less $170,000 or less $104.90 $104.90 (held harmless)
$120.00 (not held harmless)
$85,001 - $107,000 $170,001 - $214,000 $146.90 $171.00
$107,001 - $160,000 $214,001 - $320,000 $209.80 $243.00
$160,001 - $214,000 $320,001 - $428,000 $272.70 $315.00
$214,001 & above $428,001 & above $335.70 $387.00
Page 29 Northeast Planning Associates, Inc.
Services NOT Covered by Medicare
Many individuals are surprised to learn that Medicare does not cover most rou-
tine dental or eye care. Following is a list of some of the things NOT covered
by Medicare. For a more complete list refer to the Center for Medicare & Med-
icaid Services web site (www.cms.gov).
Most Chiropractic services
Cosmetic Surgery (except after an accident)
Custodial Care
Most Dental Care
Eyeglasses and eye examinations related to eyeglasses
Routine Foot Care
Supportive devices for the feet
Hearing aids and hearing examinations for prescribing, fitting or chang-
ing hearing aids
Orthopedic shoes
Medicare Supplemental Insurance (Medigap Policies)
Private insurers offer Medigap policies designed to help pay deductibles or coin-
surance incurred by Medicare beneficiaries covered by traditional Medicare
Parts A and B. Medigap policies must meet federal standards and provide access
to a “core package” of benefits. The standardized policies are identified as A, B,
C, D, F, G, K, L, M and N. Individuals are advised to seek the assistance of a
qualified Medicare Supplemental Insurance specialist to determine which plan
best fits their situation.
Medicare Part C – Medicare Advantage Plans
Unlike Medicare Part A and B which are “fee-for-service” plans, Medicare Part C
Advantage plans are designed to provide Medicare recipients a range of private
health plan choices, on a cost effective basis, as an alternative to Medicare Parts
A and B. Medicare Advantage plans are required to offer the same benefits as
Parts A and B except for hospice care. Medicare Advantage options include:
Health maintenance organizations (HMOs)
Point-of-service (POS) plans
Preferred provider organizations (PPOs)
Provider sponsored organizations (PSOs)
Private fee-for-service plans
Page 30 Quick Reference Guide
Medicare Part D – Prescription Drug Coverage
Medicare Part D, the Prescription Drug Insurance program was added to Medicare
in 2003. It is voluntary program of health insurance covering a portion of prescrip-
tion drug costs not generally covered by other Medicare programs. Although Part
D is a voluntary program individuals who wish to participate must enroll as soon as
eligible either through age (65) or loss of prior coverage. There is a penalty for
individuals who delay enrolling in a Medicare prescription drug plan beyond the
initial eligibility period. Prescription Drug Insurance is offered through private
health insurance plans. Participants with traditional Medicare can add Part D Pre-
scription Drug Insurance or choose a Medicare Advantage plan with comprehen-
sive benefits including drug coverage. Participants can change plans each year
during the traditional Medicare Open Enrollment period from October 15 to De-
cember 7th.
Plans can vary widely between the medications covered and out-of-pocket costs
for each medication. Not all pharmacies are contracted with all plans. It is im-
portant to review the individual’s medication requirements against those covered
by the plans as well as the monthly premium, yearly deductible and co-payment
requirements before deciding on a plan.
2016 Medicare Prescription Drug Insurance Standard Coverage
Medicare Part D is financed partially through premiums paid by participants. Enrol-
lees whose incomes exceed the same thresholds that are applied to higher-income
Part B enrollees pay a monthly adjustment amount. Individuals falling with these
income thresholds pay the regular plan premium to the Prescription Drug Insur-
ance carrier and the monthly adjustment amount to Medicare.
$310
Deductible
$311 - $2,850
$2,851 Until Out
of Pocket Totals
$4,550
Above
$4,550 Out
of Pocket
Costs
Individual Pays $310.00 25% up to
$635 $3,605 5%
Plan Pays -0- 75% up to
$1,905 -0- 95%
Total Drug
Expense $310 $2,850 $6,455
Unmarried Individuals
Married Filing Jointly
Married Filing
Separately
Monthly Adjust.
Amount
Less than $85,000 Less than $170,000 Less than $85,000 $0.00
$85,001 - $107,000 $170,001-$214,000 $85,001 - $129,000 $12.70
$107,001 - $160,000 $214,001 - $320,000 $32.80
$160,001 - $214,000 $320,001 - $428,000 More than $129,000 $52.80
More than $214,000 More Than $428,000 $72.90
Page 31 Northeast Planning Associates, Inc.
Medicaid
Medicaid & Elder Long Term Care
Medicaid is a state and federally funded welfare program designed to provide
health care for individuals who meet certain income/asset criteria or who are
receiving federal income maintenance payments such as Supplemental Security
Income (SSI) or Aid to Families with Dependent Children (AFDC).
Medical services provided include hospital (inpatient and outpatient), physicians’
services, medical and surgical dental services, prenatal and delivery service, post-
partum care, health care screening including diagnostic and treatment for chil-
dren. Medicaid also provides for payment of Medicare premiums for needy
elderly or disabled individuals along with home health care services and long
term care for qualifying elderly individuals.
Long Term Care Services for the Elderly
Medicare and Medigap policies do NOT pay for custodial long term care either
at home or in a nursing facility. Nursing home or assisted living care must be
paid for either by the individual receiving the care, private Long Term Care In-
surance or, if the individual qualifies, by Medicaid. Medicaid eligibility is deter-
mined by measuring the “countable assets” owned by an individual or couple.
Countable assets include any bank accounts, CDs, investments, retirement plans,
real estate (other than primary residence or income producing), Cash Value in
life insurance.
Non-countable assets include the primary residence (up to a maximum amount
of either $543,000* or $814,000* based on the state), tangible personal proper-
ty, one vehicle.
An individual can retain $2,500 of countable assets (can vary by state). For 2016
the maximum Community Spousal Resource Allowance (CSRA) is $119,220*.
This amount is used by each state to determine Medicaid eligibility for a couple.
There are two methods that states can use to calculate eligibility based on this
number.
Some states apply 100% of the couple’s countable assets toward the $119,220
maximum. In those states a couple with $100,000 of countable assets could
keep the full $100,000 and still qualify for Medicaid. In these states the minimum
CSRA never comes into consideration since the couple keeps 100% of their
countable assets up to the maximum.
Page 32 Quick Reference Guide
Other states apply 50% of the couple’s countable assets toward the $119,220
maximum. In those states a couple with $100,000 of countable assets could re-
tain only $50,000 the balance would be required to be spent down to meet the
Medicaid qualification. In the 50% states the couple would need $238,440 in
total countable assets in order to retain the full $119,220. For states applying
this method the minimum CSRA of $23,844 is used if 50% of the countable as-
sets equals less than the minimum, they couple can retain 100% of the assets up
to the $23,844.
Any amount determined to be in excess of the CSRA must be “spent down” to
the maximum CSRA value before the Medicaid applicant will be eligible to re-
ceive Medicaid benefits. Acceptable use for the excess funds includes, pre-paid
funeral expenses, burial plot, repairs to the residence, purchase of a car to re-
place an existing vehicle.
An immediate annuity can be used to provide income to the community spouse
as long as certain conditions are met. The annuity must be:
Irrevocable and Non-Commutable
Non Assignable
Actuarially sound (not exceeding the beneficiary’s life expectancy,
providing equal payments over the term with full recovery of the initial
premium paid)
In addition annuity payments cannot be deferred and the state must be named as
the remainder income beneficiary up to the amounts paid by Medicaid for the
beneficiary’s or applicant’s care.
Along with measuring an applicant’s assets the Medicaid applicant’s income must
be less than the Medicaid reimbursement rate for the specific facility where the
applicant resides. Reimbursement rates vary from one facility to another but
they are generally in excess of $4,000/month. Only income received by the
applicant is applied toward this test. Any spousal income is ignored for this pur-
pose.
Transferring Assets
Laws have been enacted on both the federal and state level to limit an individu-
al’s ability to transfer assets to another person in order to qualify for Medicaid.
Assets transferred to an individual (other than the spouse) may result in a
“disqualification period” for the Medicaid applicant.
When applying for Medicaid the applicant is asked to disclose any gifts made
within the prior 60 months. The value of any gifts made during that period is
divided by the average monthly cost of nursing home in the state of application
to determine the “disqualification period”.
Page 33 Northeast Planning Associates, Inc.
For example assume an individual made a gift of $50,000 36 months before apply-
ing for Medicaid and the average cost for nursing home care in the state is
$8,000. The disqualification period would be 6.25 months: $50,000/$8,000 =
6.25.
The 6.25 month disqualification period starts when the individual applies for Med-
icaid. The applicant would not receive Medicaid until the 6.25 month disqualifica-
tion period has passed.
Not all transfers of assets are subject to these rules. As noted above a transfer
between spouses would not trigger a disqualification period and there are special
rules relating to the transfer of a home.
Long Term Care Partnership
In 45 states (currently) the state government has partnered with private health
insurers to offer residents LTC policies designed to integrate with Medicaid. A
“Partnership LTC Policy” provides the insured with some asset protection once
the policy’s LTC benefits are exhausted for the insured’s long term care needs.
Estate Recovery
At the death of a Medicaid recipient the state government is required to attempt
to recover the Medicaid funds paid for the recipient’s care. There are very spe-
cific limits on the monies from which the state can require this reimbursement.
State laws vary however in general:
Recovery attempts cannot take place during the lifetime of the Medicaid
recipient’s spouse.
Reimbursement is only allowed against the estate of the Medicaid recipi-
ent.
The state’s ability to place a lien against the home are restricted depend-
ing on whether or not a spouse or a dependent or disabled child is living
there. .
Medicaid laws vary by state and changes can be frequent, it is important to con-
sult a legal professional with experience in the field for assistance in this area. *Source: Medicaid.gov
2016 Maine New Hampshire Massachusetts Vermont
Countable Resources
per Applicant1 $2,000 $2,500 $2,000 $2,000
Spousal Resource
Allowance2
100% of
resources
up to
$119,220
$23,844 or one-
half of the assets
up to $119,220
100% of re-
sources up to
$119,220
100% of
resources
up to
$119,220
Avg. Nursing Home
Cost per Month3 $8,365 $9,612 $10,737 $8,501
1Countable Assets do not include: Principal residence, tangible personal property, one vehicle, real property (jointly-owned & income producing), life insurance with no cash value, contractual Keogh plans, farm machinery, livestock, etc.
2 Information taken from www.elderlawanswers.com
3 Based on Semi-Private Room. Data from Genworth Cost of Care (https://www.genworth.com/corporate/about-
genworth/industry-expertise/cost-of-care.html)
Page 37 Northeast Planning Associates, Inc.
Page 38 Quick Reference Guide
Page 39 Northeast Planning Associates, Inc.
Page 40 Quick Reference Guide
Page 41 Northeast Planning Associates, Inc.
Required Minimum Distributions – Traditional IRAs
and Qualified Retirement Plans
Individuals who own a traditional IRA (including SEP or SIMPLE) are required to
take annual distributions from the IRA upon attaining age 70 ½. Participants in an
employer sponsored retirement plan are also subject to required minimum distri-
bution rules, although the starting age may be different. In determining when distri-
butions must start and the amount of the distribution it’s important to know the
following:
Required Beginning Date – The date by which the account owner must
start taking required minimum distributions.
Required Minimum Distribution (RMD) – The required withdrawal
amount from the traditional IRA or qualified employer sponsored plan.
This develops the minimum withdrawal amount the IRA owner is always
free to take more.
Required Beginning Date:
Traditional IRAs* (SEP IRAs or SIMPLE IRAs) – Not later than
April 1st of the year following the year the traditional IRA owner turns 70
½.
Qualified Plans including 403(b), 401(k), SIMPLE 401(k), pension
and profit sharing plans– Not later than April 1st of the year following
the later of (a) the plan participant reaches age 70 ½ or (b) the participant
retires. If the participant owns 5% or more of the company sponsoring
the qualified plan then distributions must start not later than April 1st of
the year following the year he or she reaches age 70 ½.
Initial Distribution Amount:
If the initial distribution is delayed until April 1st of the year following the year the
owner turns 70 ½, the initial distribution is calculated based on the values from the
prior year. In addition, if the initial distribution is delayed until this date, a 2nd distri-
bution must be taken prior to 12/31 of the year in which the initial distribution is
taken. The age factor is based on age at the end of year of withdrawal.
For example, if the IRA owner turns 70 ½ in November 2015 and does not take a
distribution until April 1, 2016, that distribution is based on the 12/31/2014 account
value(s) for the IRA and the distribution factor for age 70. An additional distribu-
tion must be taken by 12/31/2015 which is calculated based on the 12/31/2015 IRA
value(s) and the factor for age 71.
Calculating the Required Minimum Distributions
The RMD amount is calculated based on:
1. Total account value(s) of all traditional IRAs from December 31st of the
prior year and
2. The age of the account owner (and spouse) at the end of the year
IMPORTANT NOTE: In the case of ancillary benefits, such as a living benefit on an
annuity, only the sponsor company can calculate the RMD.
*Roth IRAs are NOT subject to minimum required distributions during the IRA owner’s lifetime.
Page 42 Quick Reference Guide
The RMD is determined by taking the December 31st account value(s) and dividing
the total by a factor based on the age of the IRA owner (and spouse if married).
Factors are determined by the theoretical life expectancy of the IRA owner and his
or her spouse, if married, and are found in one of two IRS tables:
Single owners or those whose spouse is no more than 10 years younger use
the factor from the Uniform Lifetime Table
Married owners whose spouse is more than 10 years younger (and the sole
beneficiary of the IRA) use the factor from the Joint and Last Survivor Table.
While the total of all IRA and qualified plan accounts is used in the calculating the
RMD the distribution may be taken from just one IRA or qualified account.
Required Minimum Distributions at Death
If the IRA owner dies after his or her required beginning date for taking RMDs, the
required minimum distribution for the year of death must be taken before the IRA
balance can be transferred for the benefit of the IRA beneficiary.
Penalty Tax
The Penalty Tax for late, missed or miscalculated RMDs is 50% of the amount that
should have been distributed. Based on the size of the penalty and the complexi-
ties of the regulation it is strongly recommended that individuals seek the help of a
professional experienced in this area.
Required Minimum Distributions for Beneficiaries
Generally, if the IRA owner had not begun taking RMDs prior to death, a non-
spouse beneficiary of an IRA has two options for taking required distributions: take
distributions based on their own life expectancy using the Single Life Table found
on page 36 (Life Expectancy Method) or withdraw the IRA balance over 5 years
(Five Year Rule).
RMDs from a beneficiary/inherited IRA must begin by December 31st of the calen-
dar year immediately following the year in which the IRA owner died.
If the beneficiary is the spouse of the owner, he or she has the additional option of
transferring the inherited IRA to an IRA in his or her name so as to avoid having to
take RMDs right away (if the spouse is younger than 70 1/2).
Titling for Beneficiary/Inherited IRA
Many IRA providers title IRAs inherited by a beneficiary as “inherited IRAs”,
“beneficiary IRAs” and “decedent IRAs”. The account should be titled so as to
make clear that it is inherited, the name of the beneficiary, and the name of the
original owner. Below are acceptable examples for Mike Smith (the beneficiary)
and John Smith (the deceased owner):
“Beneficiary IRA FBO Mike Smith B/O John Smith” (LPL uses this format)
“John Smith Decedent IRA FBO Mike Smith”
“Inherited IRA FBO Mike Smith B/O John Smith”
Page 43 Northeast Planning Associates, Inc.
Age Distribu-
tion Period
Distribu-tion % of
12/31 Acct Balance
Age Distribu-
tion Period
Distribu-tion % of
12/31 Acct Balance
70 27.4 3.65% 93 9.6 10.42%
71 26.5 3.77% 94 9.1 10.99%
72 25.6 3.91% 95 8.6 11.63%
73 24.7 4.05% 96 8.1 12.35%
74 23.8 4.20% 97 7.6 13.16%
75 22.9 4.37% 98 7.1 14.08%
76 22.0 4.55% 99 6.7 14.93%
77 21.2 4.72% 100 6.3 15.87%
78 20.3 4.93% 101 5.9 16.95%
79 19.5 5.13% 102 5.5 18.18%
80 18.7 5.35% 103 5.2 19.23%
81 17.9 5.59% 104 4.9 20.41%
82 17.1 5.85% 105 4.5 22.22%
83 16.3 6.13% 106 4.2 23.81%
84 15.5 6.45% 107 3.9 25.64%
85 14.8 6.76% 108 3.7 27.03%
86 14.1 7.09% 109 3.4 29.41%
87 13.4 7.46% 110 3.1 32.26%
88 12.7 7.87% 111 2.9 34.48%
89 12.0 8.33% 112 2.6 38.46%
90 11.4 8.77% 113 2.4 41.67%
91 10.8 9.26% 114 2.1 47.62%
92 10.2 9.80% 115 and over 1.9 52.63%
Uniform Lifetime Table
IRS Reg 1.401(a)(9)-9, Q+A-2
Page 44 Quick Reference Guide
Single Life Table
Age Life Expectancy Age Life Expectancy Age Life Expectancy
0 82.4 38 45.6 76 12.7
1 81.6 39 44.6 77 12.1
2 80.6 40 43.6 78 11.4
3 79.7 41 42.7 79 10.8
4 78.7 42 41.7 80 10.2
5 77.7 43 40.7 81 9.7
6 76.7 44 39.8 82 9.1
7 75.8 45 38.8 83 8.6
8 74.8 46 37.9 84 8.1
9 73.8 47 37.0 85 7.6
10 72.8 48 36.0 86 7.1
11 71.8 49 35.1 87 6.7
12 70.8 50 34.2 88 6.3
13 69.9 51 33.3 89 5.9
14 68.9 52 32.3 90 5.5
15 67.9 53 31.4 91 5.2
16 66.9 54 30.5 92 4.9
17 66.0 55 29.6 93 4.6
18 65.0 56 28.7 94 4.3
19 64.0 57 27.9 95 4.1
20 63.0 58 27.0 96 3.8
21 62.1 59 26.1 97 3.6
22 61.1 60 25.2 98 3.4
23 60.1 61 24.4 99 3.1
24 59.1 62 23.5 100 2.9
25 58.2 63 22.7 101 2.7
26 57.2 64 21.8 102 2.5
27 56.2 65 21.0 103 2.3
28 55.3 66 20.2 104 2.1
29 54.3 67 19.4 105 1.9
30 53.3 68 18.6 106 1.7
31 52.4 69 17.8 107 1.5
32 51.4 70 17.0 108 1.4
33 50.4 71 16.3 109 1.2
34 49.4 72 15.5 110 1.1
35 48.5 73 14.8 111 and over 1.0
36 47.5 74 14.1
37 46.5 75 13.4
Page 45 Northeast Planning Associates, Inc.
Retirement Plan Distributions Before Age 59 ½
Federal law provides significant tax benefits to most employer-sponsored and
individual retirement plans. Contributions to plans such as a 401k and tradition-
al IRA may be tax-deductible and growth inside an account is tax-deferred. The
purpose of these tax breaks is to encourage and reward saving for retirement.
If funds are taken out of a retirement account before the owner reaches age 59
½, however, the distribution is viewed as being ‘early’ and a 10% penalty is ap-
plied to that portion of the distribution. In addition to the withdrawal being
taxed at the owner’s highest marginal tax rate, the 10% penalty that is applied
can make the tax burden painfully high and often a last resort to gain access to
one’s investments.
How Bad is the Tax “Bite”?
Assume that an individual who is in the 25% federal income tax bracket takes a
withdrawal of $10,000 from his 401(k) plan. How much will he pay in taxes on
that distribution?
Initial amount withdrawn: $10,000
Less: Federal Income Tax @ 25% -$ 2,500
Less: 10% Penalty -$ 1,000
= Net After Taxes: $ 6,500
Our hypothetical taxpayer must surrender 35% of the amount initially with-
drawn just to pay federal income taxes. If state or local tax law also taxes such
distributions, the total cost would be even higher.
What Types of Retirement Plans are Subject to the 10% Early With-
drawal Penalty?
Two types of retirement plans are subject to the 10% penalty:
Qualified Plans: Include “qualified” defined contribution retirement plans such
as 401(k) plans, 403(b) plans and 403(b) annuity contracts, 403(a) annuity
plans, SIMPLE 401(k) plans, and Profit Sharing and Money Purchase plans.
Distributions from 457 plans are generally not subject to the 10% penalty.
Individual Retirement Plans: Include traditional IRAs, Roth IRAs*, individual
retirement annuities, Simplified Employee Pension (SEP) IRAs, and SIMPLE
IRA plans.
* For a withdrawal to be an income tax-free qualified distribution, it must occur after the Roth IRA owner’s 5-year
holding period and satisfy one of the other requirements (e.g. withdrawal taken on or after the owner reaches age 59
1/2 or the owner’s death). The Roth IRA owner’s 5-year holding period begins with the first tax year for which a
regular contribution (or, if earlier, in which a conversion contribution) is made to any Roth IRA of which the taxpayer is
the owner. Each conversion before age 59 1/2 creates its owner 5-year period for purposes of applying the 10% penalty
tax on premature distributions from the Roth IRA.
Page 46 Quick Reference Guide
General Description Applicable
to Quali-
fied Plans?
Applicable
to IRAs?
Separation from service after age 55: Distributions made to
an employee after separating from service after reaching age
55. Yes No
Qualified Domestic Relations Order (QDRO): Distributions
made to an alternate payee, such as in a divorce. Yes No
Death or disability: Distributions made due to the death or
disability of the account owner. Yes Yes
Substantially Equal Periodic Payments (SEPPs): Distributions
that are part of a series of SEPPs made over the life (or life
expectancy) of the taxpayer or made over the joint life (or
joint life expectancies) of the taxpayer and a beneficiary.
Yes Yes
Medical Expenses: Distributions made to pay for deductible
medical expenses. Only the portion that exceeds 7.5% of AGI
is exempt from the 10% penalty. Yes Yes
Higher Education Expenses: Distributions made to pay for
‘qualified higher education expenses’ for the taxpayer, spouse,
child or grandchild. The expenses must be incurred in the
year of distribution and generally include tuition, fees, books,
supplies and equipment for attendance at an eligible education-
al institution.
No Yes
First-time Homebuyer: Distributions of up to $10,000 to buy,
build, or rebuild a first home. A ‘first-time homebuyer’ is
someone who had no ownership in a principal residence in the
two years prior to buying the new home. The funds must be
used within 120 days of receipt.
No Yes
Unused Health Insurance Premiums: Distributions made to
certain unemployed individuals to pay for health insurance
premiums. The individual must have lost a job or generally
must have received unemployment compensation for at least
12 weeks because of the job loss.
No Yes
Qualified Reservist: Distributions made to a military reservist
called to active duty for more than 179 days (or indefinitely)
after September 11, 2001. Such distributions may be repaid
within two years after the end of active duty.
Yes Yes
Transfer to a Health Savings Account (HSA): A once-in-a-
lifetime distribution of amounts in a Traditional or Roth IRA,
in a direct, trustee-to-trustee transfer. The distribution is
limited to the maximum amount for the year that could other-
wise be contributed to the HSA and deducted.
No Yes
IRS Levy on the Account: Distributions made to satisfy an IRS
levy on the account. Yes Yes
Qualified Rollover: Generally a transfer of funds from one
IRA or qualified plan to an eligible recipient IRA or qualified
plan are exempt. Yes Yes
Correct Excess Contributions: Generally, distributions made
to correct excess contributions, either by the account owner,
employer, or both are exempt. Yes Yes
Possible Exceptions to the 10% Penalty Tax
Page 47 Northeast Planning Associates, Inc.
Reas
on for
Dis
trib
ution
Ear
nin
gs
Tax
able
Subje
ct t
o
10%
Penal
ty
Ear
nin
gs T
axa-
ble
Subje
ct to
10%
Penal
-
ty
On o
r af
ter
Age
59 1
/2
Yes
No
No
No
Befo
re a
ge 5
9 1
/2 (
Not
subje
ct t
o P
enal
ty E
xce
ptions
liste
d
belo
w)
Yes
Yes
Yes
Yes
1. D
eat
h
Yes
No
No
No
2. D
isab
ility
Y
es
No
No
No
3. F
irst
Tim
e H
om
ebuye
r—$10,0
00 L
imit
Yes
No
No
No
4. S
ubst
antial
ly E
qual
Peri
odic
Pay
ments
Y
es
No
Yes
No
5. M
edic
al e
xpense
s ab
ove
7.5
% o
f A
GI
Yes
No
Yes
No
6. In
sura
nce
pre
miu
ms
for
unem
plo
yed
Yes
No
Yes
No
7. H
igher
Educa
tion E
xpense
s Y
es
No
Yes
No
Roth
IR
A E
arnin
gs P
aid O
ut
BEFO
RE 6
Year
s
Roth
IR
A E
arnin
gs P
aid O
ut
AFT
ER
5 Y
ear
s
Dis
trib
uti
on o
f R
oth
IR
A E
arn
ings
Page 48 Quick Reference Guide
Backdoor Roth IRA Contribution
Generally, if adjusted gross income (AGI) exceeds the higher end of the phase-
out ranges, one cannot make contributions to a Roth IRA. The removal of in-
come limits for converting a Traditional IRA to a Roth IRA in 2010 brought to
light a new strategy for contributing to a Roth IRA if AGI is above the phase-outs,
called a Backdoor Roth IRA Contribution.
Anyone at any income level can choose to make a non-deductible contribution to
a Traditional IRA up to the annual maximum. Employing the backdoor strategy,
this contribution can subsequently be converted to a Roth IRA, with theoretically
a $0 or near zero tax bill, depending on any capital gain between the time of con-
tribution and the conversion.
Two important considerations: 1. The conversion is subject to IRA aggregation rules, where the taxability is
prorated based on the proportion of total IRA assets that were non-
deductible contributions.
2. Utilizing this on a consistent basis may put the conversion at risk of the IRS
applying the step transaction doctrine, treating the conversion as a Roth IRA
contribution, with appropriate taxes excise tax levied.
Roth Conversion
A conversion is a penalty-free taxable transfer of amounts from a traditional IRA
to a Roth IRA. You can convert part or all of the money in your regular IRA to a
Roth IRA. When you convert your traditional IRA to a Roth IRA, you will pay
income tax on the amount converted. Before 2010 a taxpayer is only eligible to
convert a Traditional IRA to a Roth IRA, if he or she has a modified adjusted
gross income (MAGI) that doesn’t exceed $100,000. Additionally, the taxpayer
cannot file a married filing separately return. The Tax Increase Prevention and
Reconciliation Act of 2005 (TIPRA) created an opportunity for many taxpayers;
this opportunity is the ability to convert a tax deferred Traditional IRA into a tax-
free Roth IRA starting in 2010 regardless of income. Also, filing status restrictions
are also lifted, allowing married taxpayers filing a separate return to convert a
Traditional IRA to a Roth IRA.
In addition to a Traditional IRA, you may be able to convert the
following into a Roth IRA:
Qualified plan distribution
403(b) plan distribution
Simple IRA
SEP IRA
An interesting option is a re-characterization which allows someone to "un-do" a
Roth conversion. It essentially makes the situation the same as if a conversion
never took place; no taxes are due and the account is still treated as a Traditional
IRA. There are rules and time-limits regarding re-characterization, and an advisor
should be consulted.
Page 49 Northeast Planning Associates, Inc.
Reasons to Convert to a Roth IRA Roth IRAs offer a unique and exciting retirement savings opportunity.
With a Roth IRA:
Contributions are allowed at any age
Qualified distributions are tax-free
No Required Minimum Distributions (RMD)
The benefits of a Roth conversion are significant and worth considering, but
may not apply to all investors. Here are a few reasons a Roth conversion may
be right for you.
Looking to diversify your tax exposure? By converting to a Roth IRA, and
paying any conversion tax from other personal assets, you are shifting more of
your assets into tax-favored status.
Was your income too high to participate in a Roth IRA before the
TIPRA changes?
Many higher income taxpayers are currently ineligible to contribute to Roth
IRA’s. The TIPRA legislation gives many of these same individuals access to the
unique benefits of a Roth IRA starting in 2010.
Do you think taxes will rise in the future? Many taxpayers believe tax
rates will only go up in the future. Converting to a Roth IRA, will allow you to
pay taxes now, and your withdrawals in retirement would be exempt from
taxes, even if income tax rates were to rise in the future.
Do you want to maximize the wealth transfer to your children? Roth
IRAs may be a more attractive vehicle than a Traditional IRA. Traditional IRAs
require you to take a minimum withdrawal (and pay tax on it) from the IRA
once you reach the age of 70½, even if you don’t need the money. Roth IRAs
do not have these required withdrawals, allowing you to keep these savings
invested tax-free and available to pass to your children, although your benefi-
ciaries must take minimum distributions after your death. Your heirs will also
receive tax-free withdrawals from the inherited Roth IRA compared to an
inherited Traditional IRA.
Page 50 Quick Reference Guide
Roth Conversion Decision Tree Use the Roth Conversion Tree to determine whether or not converting a Traditional
IRA to a Roth IRA is the appropriate strategy.
Roth Conversion Decision Tree Use the decision tree to determine whether or not converting a Traditional IRA to a Roth IRA is the right choice.
Tax Bracket
Do you think you will be in the
same or higher tax bracket
when you retire?
Converting to a Roth IRA may not
make sense if the conversion tax rate
is greater than future tax rates.
However, an analysis still may be
necessary because if taxes are paid
from other assets, it still may be
beneficial to convert.
If your time horizon is not sufficiently
long enough, the tax-free earnings of
a Roth IRA may not have time to
grow in order to offset the taxes paid
at the time of conversion. Amounts
received may not be tax-free as a
qualified distribution, and penalty
taxes may also apply if withdrawals
occur too soon.
Time Horizon
Do you expect to start making
withdrawals after 5 or more
years?
Tax Payment
Do you have enough money out
of pocket to pay the taxes due on
the conversion? If you cannot pay the taxes incurred
from a conversion using other
sources, then converting to a Roth
IRA may not make sense.
If you pay the taxes from the IRA,
you will lose the potential advantage
of tax-free growth on the amount
paid in taxes and for those under 59
½ you will likely incur a penalty.
Yes
Yes
Yes
No
No
No
A conversion to a
Roth IRA may make
sense for you.
Page 51 Northeast Planning Associates, Inc.
Trusteed IRA
A Trusteed IRA is a trust account that integrates IRA retirement savings goals with
estate planning objectives. A Trusteed IRA is treated much the same way as any
inherited IRA. One main difference between the two however is how the inherit-
ed IRA assets are handled when the IRA owner dies. With a typical IRA, an own-
er’s beneficiary takes full control of the inherited IRA assets upon the death of the
owner and determines when and how much will be distributed, so long as they
take their Required Minimum Distributions (RMDs). Under a Trusteed IRA, the
terms of the trust dictate the distribution schedule and conditions, and can provide
potential benefits such as:
1. Require beneficiary to stretch IRA withdrawals over their lifetime.
2. Set certain conditions to receive IRA assets (e.g. attaining a certain age,..).
3. Simplified tax reporting through 1099 only, no 1041 or K‐1.
4. Special distributions for disability, education, home purchase, etc.
5. Potential additional creditor protection. Note that this is a state issue, and
some states will not provide creditor protection as they do not consider an
inherited IRA a retirement account.
6. Provide financial support to a surviving spouse while ensuring the remaining
assets pass to children from a prior marriage.
Incentive Stock Options (ISO)
If the stock is immediately sold after the exercise of the option, the Net Value will
be considered ordinary income, and will be taxed accordingly. Therefore, there is
no income tax advantage of exercising one option over another if the stock is to
be immediately sold. The individual will be responsible for the payment of the
taxes, not the employer.
As an ISO, there is an income tax advantage if the grant is held for two years and
the stock is held for a period of at least one year after exercise. In that case, the
subsequent sale of the stock would be subject to capital gains tax treatment, which
is currently taxed at a maximum of 23.8%. Again, however, because the tax treat-
ment is the same for all ISOs, there is no particular advantage to exercising one
option over another. The issue would be the future value of the stock upon ulti-
mate sale. Thus, the greater the difference between the stock option price and the
current price, the greater the leverage for capital gains tax treatment.
Be advised that the difference between the option price and the fair market value is
considered an adjustment to income for AMT purposes, unless stock is sold in the
same year option is exercised.
Non-Qualified Stock Options (NQO)
Upon exercise of Non-Qualified Options, the Employee immediately recognizes
the gain upon exercise as ordinary income. The gain is the difference between the
current market value and the option price. The income is required to be reported
by the Employer and is subject to income tax withholding. This reporting is includ-
ed on the Employee's W-2. Tax treatment on the sale of the stock is normal capi-
tal gain at short-term or long-term rates depending on the holding period.
Page 52 Quick Reference Guide
CO
MPA
RA
TIV
E F
EA
TU
RES
FLEX
IBLE S
PEN
DIN
G A
CC
OU
NT
S (F
SA)
HEA
LT
H R
EIM
BU
RSE
MEN
T A
RR
AN
GEM
EN
TS
(HR
A)
HEA
LT
H S
AV
ING
S A
CC
OU
NT
(H
SA)
Acco
un
t F
eatu
res
FS
A
HR
A
HS
A
What
is
the P
urp
ose
T
o r
eim
burs
e q
ual
ifie
d m
edic
al,
denta
l vi
sion a
nd/o
r dependent
care
expense
s w
ith p
re-t
ax d
olla
rs
To r
eim
burs
e q
ual
ifie
d m
edic
al
expense
s
To p
ay for
unre
imburs
ed q
ual
i-
fied m
edic
al e
xpense
s an
d s
ave
for
futu
re e
xpense
s
Who o
wns
the a
ccount
Em
plo
yee
Em
plo
yer
Em
plo
yee
“Use
it
or
lose
it”
by
end o
f bene-
fit
year
Yes
(subje
ct t
o 2
½ m
onth
Gra
ce P
eri
-
od w
hen e
xpense
s fr
om
curr
ent
yr. ca
n b
e p
aid w
ith p
rior
year
Unuse
d funds
may
be c
arri
ed o
ver
from
one b
enefit
year
to t
he n
ext
Unuse
d funds
are c
arri
ed o
ver
from
one b
enefit
year
to t
he
next
Can
the e
mplo
yee a
ccess
the
acco
unt
afte
r jo
b t
erm
inat
ion
Yes—
Elig
ible
under
CO
BR
A
May
be—
em
plo
yer
may
opt
to g
ive
acce
ss o
r m
ay k
eep t
he m
oney
Yes
Can
the e
mplo
yee c
ontr
ibute
to
the a
ccount?
Yes
No, only
the e
mplo
yer
can c
on-
trib
ute
Yes
both
em
plo
yee a
nd e
m-
plo
yer
can c
ontr
ibute
in t
he
sam
e y
ear
Page 53 Northeast Planning Associates, Inc.
Acco
un
t F
eatu
res
FS
A
HR
A
HS
A
Must
be t
his
pai
red w
ith a
hig
h-
deduct
ible
heal
th p
lan?
No
No
Yes
May
this
be u
sed in c
onju
nct
ion
with o
ther
heal
th c
are s
pendin
g
acco
unts
?
Yes
Yes
Yes
May
the m
oney
be u
sed for
ex-
pense
s oth
er
than
heal
th c
are
No
No
Yes,
it
then b
eco
mes
taxab
le
inco
me a
nd w
ill t
rigg
er
an a
ddi-
tional
10%
tax
penal
ty
What
are
the t
ax c
onse
quence
s FSA
ele
ctio
ns
reduce
tax
able
inco
me.
Save
s FIT
, SI
T, FIC
A
HR
A d
istr
ibutions
are
tax
-fre
e
HSA
dis
trib
utions
are t
ax-f
ree for
elig
ible
expense
s. In
tere
st a
c-
crues
tax d
efe
rred
Contr
ibution L
imits—
2016
$2,5
50 s
ubje
ct t
o
Use
it
or
lose
it
ove
r $500
None—
dete
rmin
ed b
y
Em
plo
yer
annual
ly
Self O
nly
—$3,3
50
Fam
ily—
$6,7
50
$1,0
00 C
atch
Up o
ver
55
CO
MPA
RA
TIV
E F
EA
TU
RES
FLEX
IBLE S
PEN
DIN
G A
CC
OU
NT
S (F
SA)
HEA
LT
H R
EIM
BU
RSE
MEN
T A
RR
AN
GEM
EN
TS
(HR
A)
HEA
LT
H S
AV
ING
S A
CC
OU
NT
(H
SA)
Page 54 Quick Reference Guide
NOTES
Page 57 Northeast Planning Associates, Inc.
529 Higher Education Savings Plan
Under IRC Sec. 529, federal tax law allows states to establish tax-advantaged sav-
ings programs to pay for students’ qualified higher education expenses. In these
programs, cash contributions are made to an account established for a named bene-
ficiary, which may or may not be the same as the account owner.
Under federal tax law, contributions are not tax deductible; however any growth in
an account is tax-deferred. Distributions used solely to pay for qualified higher
education expenses are federally tax-exempt. Contributions may or may not be tax
deductible,
Key Definitions Under IRC Sec. 529
Qualified Higher Education Expenses: Generally, tuition, fees, books,
supplies, and equipment and technology required for attendance qualify.
Reasonable costs of room and board are also included if the student is
attending school at least half-time. Additionally, qualified higher educa-
tion expenses include costs incurred to allow a special needs beneficiary
to enroll at and attend an eligible institution.
Eligible Educational Institution: Accredited post-high school educational
institutions in the U.S. offering associate’s, bachelor’s, graduate level, or
professional degrees typically qualify as eligible. Certain vocational
schools and international institutions are also included.
Contributions
Contributions to a savings plan must be in cash and may not exceed the amount
necessary to provide the beneficiary’s qualified higher education. Program sponsors
will specify the maximum allowable contribution. In many programs, more than
$300,000 may be contributed for a single beneficiary. While some donors contrib-
ute lump-sum amounts, many 529 plan accounts are set up with automatic monthly
payments. Other considerations include:
For federal gift tax purposes, contributions are considered completed
gifts of a present interest. Generally, no federal gift tax will be payable if
a contribution is limited to the annual gift tax exclusion amount. For
2016, this is $14,000. A married couple can elect to split gifts for a total
annual contribution of $28,000.
The donor may elect to “superfund” a 529 plan by contributing up to 5
times the annual exclusion amount, and have such amount be treated as
though it had been made equally over 5 years, and avoid paying gift taxes.
See page 59.
Contributions may be made to both a 529 savings plan and a Coverdell
Educational Savings Accounts (Coverdell ESA) for the same beneficiary in
the same year. Coverdell ESA annual maximum contribution per benefi-
ciary is $2,000.
Page 58 Quick Reference Guide
Distributions
For federal income tax purposes, distributions used to pay for qualified higher educa-
tion expenses are generally excluded from income if the amount distributed does not
exceed the amount of qualified education expenses. If a distribution is greater than the
amount of qualified education expenses, the earnings may be subject to federal income
tax and a 10% penalty tax may also apply.
Distributions due to death or disability of the beneficiary, or the recipient of
certain scholarships: The earnings portion of the distribution is taxable as ordi-
nary income to the recipient of the payment.
Rollover Distributions: Federal law allows one tax-free transfer every twelve
months, from one savings plan to another, for the same beneficiary. Funds may
be rolled from a 529 savings plan to a 529 pre-paid tuition plan and vice versa. If
there is a change of beneficiary within the same family (including siblings, children,
grandchildren, parents, nieces, nephews, uncles, aunts, their spouses, and first
cousins), the rollover must be completed within 60 days or the earning portion
will be subject to tax. If a new beneficiary is not part of the same family as the
original beneficiary, the earnings portion of the transfer is subject to current
income tax.
Other Distributions: If a distribution is made from a 529 savings plan for any
other reason than qualified higher education expenses the earnings portion of the
distribution is included in the taxable income of the recipient. A 10% penalty tax
is also applied against the distributed earnings.
State and Local Law: State and local law can vary widely from federal law with
regard to the income tax treatment of contributions and withdrawals.
Coordination with Other Programs: A beneficiary may generally also claim either
the American Opportunity Tax Credit or Lifetime Learning Credit (not both in
the same tax year), receive a distribution from a Coverdell ESA, or claim the
tuition and fees deduction, as long as the qualifying educational expenses are not
the same.
Higher Education Savings Account Characteristics
There are a number of account characteristics that a donor should clearly understand:
The beneficiary must be identified at the time the account is created. The ac-
count owner is usually the primary contributor; however others, such as grand-
parents, may also contribute.
The account owner may change the beneficiary. If the new beneficiary is a mem-
ber of the same family, there is generally no current federal income tax liability.
Members of the same family include: siblings, children, grandchildren, parents,
nieces, nephews, uncles, aunts, their spouses, and first cousins.
Amounts accumulated in a savings plan operated by one state generally may be
used at educational institutions in a different state, or even internationally.
Under federal law, 529 savings plan investments are not permitted to be self-
directed by either the beneficiary or the account owner. Account owners may,
however, choose among broad investment strategies established by the program
sponsor. A change in investment strategy is generally permitted once each calen-
dar year, or when a new beneficiary is named.
Most savings plans require that funds in a custodial account become the property
of the beneficiary when the beneficiary reaches his or her majority. A custodial
account is one set up under the Uniform Transfers to Minors Act (UTMA), the
Uniform Gifts to Minors Act (UGMA), or the local state version.
Page 59 Northeast Planning Associates, Inc.
Superfunding a 529 Plan
“Superfunding” is another term for taking advantage of the 5-year gift-tax election
that can be made when contributing to a 529 College Savings Plan. A great way to
jumpstart savings for a child’s future college expenses, the tax law allows an indi-
vidual to contribute up to 5-times the annual gift tax exclusion amount per benefi-
ciary at one time without affecting their lifetime exemptions.
Eligible contributions of no more than $70,000 in a year: While an individual can
contribute up to the maximum a 529 will allow (many times $300,000 or more),
only $70,000 is eligible for the 5-year election. Thus, if an individual contributed
$100,000 in a year to a beneficiary’s 529 plan, $14,000 plus the excess over
$100,000 ($30,000) will be considered this year’s gift. The $30,000 in excess will
applied against the client’s lifetime gift and estate tax exclusion amount.
If you wish to use this election, any contribution amount between $14,001 and
$70,000 is spread over 5-years with no exceptions. If a client contributes $28,000
in one year in hopes of using the $14,000 annual gift tax exclusion amount for the
next two years, that will not be allowed. In this example, $5,600 will be applied as
a gift in each of the next 5 years, leaving $8,400 per year of unused annual exclu-
sion on the table.
The election is all or nothing: An individual cannot contribute $50,000 to a 529
plan, and only elect the 5-year treatment on $30,000. The Form 709 Gift Tax
Return does not have a partial amount of the gift as an option.
Other Issues to Consider
Home State Plans: The fees, expenses and features of higher education sav-
ings plan vary widely from state to state; some states have more than one
plan.
Effect on Financial Aid: Assets in a 529 savings plan are considered in the
“Expected Family Contribution” calculations. Tax-free distributions from a
529 savings account (those used to pay for qualified education expenses) are
not counted as income to either the parent or student in the financial aid
determination process. Assets held in a 529 can reduce financial aid, howev-
er the extent of the reduction is between 5.0% - 5.64%.
When a child turns 18, they are considered a legal adult. Under HIPPA rules,
without proper authorization, the child’s parents have no right to their
health records or decision-making. Consider establishing a health care pow-
er of attorney, giving rights to the parents. Keep copies of the POA at
home, with the child’s primary care physician, and at the college.
Internet Resources
The College Board: www.collegeboard.com
FinAid! The SmartStudent® Guide to Financial Aid: www.finaid.org
College Savings Plan Network: www.collegesavings.org
Savings for College: www.savingforcollege.com
U.S. Dept. of Education: www.studentaid.ed.gov
Page 60 Quick Reference Guide
NOTES
Page 63 Northeast Planning Associates, Inc.
2016 Estate & Gift Tax Table
Taxable Gift Taxable Gift Tax on Rate on
From To Col. 1 Excess
$ 0 $ 10,000 $ 0 18%
10,000 20,000 1,800 20%
20,000 40,000 3,800 22%
40,000 60,000 8,200 24%
60,000 80,000 13,000 26%
80,000 100,000 18,200 28%
100,000 150,000 23,800 30%
150,000 250,000 38,800 32%
250,000 500,000 70,800 34%
500,000 750,000 155,800 37%
750,000 1,000,000 248,300 39%
1,000,000 5,430,000 345,800 40%
5,450,000 —— 2,155,800 40%
Estate Tax Exclusion Amount
Year Exclusion Amount Tax Credit
2016 5,450,000 $2,155,800
Portability between spouses is now permanent. (“DSUE” = Deceased
Spousal Unused Exclusion).
Basis is stepped up at death.
Why consider Marital or CST trusts?
DSUEA amount is NOT indexed after the first death.
CST will shelter future appreciation.
Marital trust can irrevocably name beneficiaries.
Trust assets are generally sheltered from creditors and are kept
private.
Annual Exclusion for Gifts $14,000 per donee
Annual Exclusion for Gifts to Non-Citizen Spouse $148,000
Page 64 Quick Reference Guide
Transfer on Death
Many states have adopted a version of the Uniform TOD Security Registration
Act (The Act). TOD is an acronym that stands for ‘transfer on death’. The
provisions of the Act permit securities and securities accounts to be registered
so that ownership automatically passes to named beneficiaries upon the death of
the owner or the last-to-die of multiple owners. In general, the result is a sim-
plified, non-probate transfer similar to pay-on-death (POD) transfers of bank
accounts and Totten trusts. Assets transferred via TOD registration generally
receive a full step up in basis.
In the case of multiple owners, the property must be titled so that ownership
will vest in the survivor of them before the asset passes to the named benefi-
ciary. Thus, the owners may hold the property as joint tenants, as tenants by
the entireties, or as ‘owners of community property held in survivorship form’.
A disadvantage of multiple ownership is that all parties must sign for any future
account changes.
Beneficiary Designations
Beneficiary designations determine who receives the assets at death. The Act
allows naming a contingent beneficiary to receive assets if the beneficiary fails to
survive. It also provides that ‘lineal descendants per stirpes’ may be substitute
beneficiaries. ‘Per stirpes’ is a Latin term which can be translated variously as
‘per branch’ or ‘by the roots’. In estate planning it refers to a common method
of dividing an estate among the heirs of an estate owner.
Creditor and Third-Party Claims
Generally, The Act does not provide any protection against the claims of third
parties such as creditors, or individuals with other interests, such as a spouse’s
community property interest. A creditor or other party asserting a conflicting
interest can do so simply by giving notice to the registering entity (the broker-
dealer). As a practical matter, this will usually block transfer of the assets until
the conflict is resolved. Any protection against third-party claims is on a state-
by-state basis.
Acronyms Approved in Statute Examples of Use
TOD = transfer on death John S. Doe TOD John S. Doe, Jr.
POD = pay on death John S. Doe POD John S. Doe, Jr.
JT TEN = joint tenants John S. Doe Mary B. Doe JT TEN TOD John S. Doe, Jr.
SUB BENE = substitute beneficiary John S. Doe TOD John S. Doe, Jr. SUB BENE Peter Doe
LDPS = lineal descendants per stirpes John S. Doe Mary B. Doe TOD John S. Doe, Jr. LDPS
Page 65 Northeast Planning Associates, Inc.
Charitable Remainder Trusts
BENEFITS OF A CHARITABLE REMAINDER TRUST
What it is: A Charitable Remainder Trust (CRT) is an irrevocable trust which
provides income to the trust income beneficiaries for life with the remainder of
trust assets passing to a charity at the death of the income beneficiaries (or fixed
number of years).
When to consider: Individuals with highly appreciated property may wish to
consider a Charitable Remainder Trust. Assets contributed to a CRT can be sold
without being subject to capital gains taxes. As a result 100% of the sales proceeds
are available for investment to produce income for the beneficiaries. In addition
the donor receives a current income tax deduction based on the present interest
value of the asset that will ultimately go to charity. Assets contributed to a CRT
are also removed from the donor’s taxable estate thereby reducing estate taxes as
well.
Types of Trusts:
Charitable Remainder Annuity Trust (CRAT) – Income from a CRAT is a
fixed dollar amount determined when the trust is established. The payment does
not vary from year to year regardless of the investment return on the underlying
trust assets. If investment return is not adequate to make the required payment to
beneficiaries then the trustee must sell assets to make up the difference.
Charitable Remainder Unitrust (CRUT) – Income from a CRUT is based on
a percentage of trust assets at inception and as of a specific date each year thereaf-
ter. As a result the income payment to beneficiaries will vary annually.
Variations of Charitable Remainder Unitrusts:
NICRUT – Net Income Charitable Remainder Unitrust – A
NICRUT is a CRUT structured so that ONLY income generated by the
trust may be distributed to the beneficiaries. This avoids invasion of the
trust corpus to meet the required annual payment.
NIMCRUT – Net Income Charitable Remainder Unitrust with
Makeup provision – Similar to a NICRUT a NIMCRUT allows for the
makeup of any prior missed or reduced payments due to the lack of
adequate income from trust assets to meet the annual payment percent-
age.
Avoid Capital Gains taxes on sale of appreciated assets
Provide lifetime income to beneficiaries
Reduce current Federal Income Tax
Reduce Estate Taxes of donor(s)
Provide a charitable legacy
Potentially provide a tax free legacy to heirs
Page 66 Quick Reference Guide
FLIP Charitable Remainder Unitrust – A Flip CRUT is a net-
income trust which contains specific language providing for the trust to
“flip” from a net-income trust to a standard Unitrust based on a trigger-
ing event or specific future date. A FLIP trust may be indicated if the
trust will be funded with an illiquid asset, such as real estate, which may
take some time to sell. As a Net Income Trust there is no requirement
to make annual payments if no income has been generated by the trust.
A Flip CRUT may also be considered by an individual looking for the
current tax deduction, tax deferred growth of trust assets and the ability
to turn the income on in the future.
Wealth Replacement: Assets placed in a CRT are removed from the donor’s
taxable estate which also reduces the legacy passing to heirs. Life insurance on the
donor(s) may be an option for replacing the value of the trust assets to the heirs.
A portion of the income payment from the CRT can be used to fund a life insur-
ance policy to benefit the heirs. An Irrevocable Life Insurance Trust can be used as
both owner and beneficiary of the life insurance. Properly structured this will
provide estate and income tax free cash to the heirs.
Other Considerations:
Gift Taxes – If income from a CRT is payable to someone other than
the donor federal gift taxes may apply. It is possible to structure pay-
ments to these income beneficiaries to qualify for the annual gift tax
exclusion.
Accounting – CRTs, especially NICRUTs and NIMCRUTS are subject
to specific and complex accounting requirements for determining income
and payments made to beneficiaries. It is important to engage profes-
sionals with expertise in these areas.
Charitable Lead Trusts
Similar to but somewhat the reverse of Charitable Remainder Trusts, a Charitable
Lead Trust is an irrevocable trust funded by a gift of assets from the donor(s). The
trust then pays income to a qualified charity for a set period of years or the life-
times of specified individuals. After the trust term ends trust assets are distributed
to the donor(s), spouse, heirs, or others.
A Charitable Lead Annuity Trust pays a fixed dollar amount to the charity annually
during the term. A Charitable Lead Unitrust pays a fixed percentage of the trust
assets to the charity.
Other Considerations:
Transfer Taxes – If the assets funding the trust are paid to a recipient(s)
other than the donor(s), gift taxes and potentially the Generation Skip-
ping Transfer Tax (GSTT) may apply.
Estate Taxes – Trust assets returned to the donor after the term of the
trust ends will be included in the donor’s taxable estate. However,
Charitable Lead Trusts can be set up as non-grantor trusts with the trust
assets going to someone other than the donor. These assets can pass to
family members with a significant valuation discount thereby reducing the
donor’s taxable estate with reduced gift tax impact.
Page 67 Northeast Planning Associates, Inc.
NOTES
Page 68 Quick Reference Guide
NOTES
Page 71 Northeast Planning Associates, Inc.
Year Annual
Percentage
Increase
Purchasing Power of the
Dollar
1967 100.0 n/a $1.00
1976 170.5 5.8% $0.59
1977 181.5 6.5% $0.55
1978 195.3 7.6% $0.51
1979 217.7 11.5% $0.46
1980 247.0 13.5% $0.41
1981 272.3 10.2% $0.37
1982 288.6 6.0% $0.34
1983 297.4 3.0% $0.33
1984 307.6 3.4% $0.32
1985 318.5 3.5% $0.31
1986 323.4 1.5% $0.31
1987 335.0 3.6% $0.29
1988 348.4 4.0% $0.28
1989 365.2 4.8% $0.27
1990 384.4 5.3% $0.25
1991 399.9 4.0% $0.25
1992 411.5 2.9% $0.24
1993 423.1 2.8% $0.24
1994 433.8 2.5% $0.23
1995 446.1 2.8% $0.22
1996 459.1 2.9% $0.22
1997 469.3 2.2% $0.21
1998 475.6 1.3% $0.21
1999 486.2 2.2% $0.20
2000 503.1 3.5% $0.20
2001 516.8 2.7% $0.19
2002 523.9 1.4% $0.19
2003 535.6 2.2% $0.19
2004 549.5 2.6% $0.18
2005 568.9 3.5% $0.17
2006 587.2 3.2% $0.17
2007 604.0 2.9% $0.17
2008 628.7 4.1% $0.16
2009 624.4 -0.7% $0.16
2010 637.3 2.1% $0.16
2011 660.0 3.6% $0.15
2012 673.9 2.1% $0.15
2013 683.1 1.4% $0.14
2014 693.4 1.5% $0.14
Inflation: 1967 - 2014
Source: U.S. BOL - CPI for Urban Wage Earners & Clerical Workers (CPI-W). http://data.bls.gov/
pdq/SurveyOutputServlet. Purchasing power of the dollar is rounded off to the nearest cent.
Page 72 Quick Reference Guide
Inflation - Decades in Review
Average Annual CPI Increase
The 70's 1970-1979 7.1%
The 80's 1980-1989 5.4%
The 90's 1990-1999 2.9%
The 2000's 2000-2009 2.5%
Last 40 Yrs 1975-2014 4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
1975 1985 1995 2005
History of Inflation
CPI Annual % Increase 1975 - 2014
Page 73 Northeast Planning Associates, Inc.
Tax-Exempt vs. Taxable Income Tables
The following charts allow you to compare the returns on tax-exempt investments
to those that are taxable. After determining your marginal federal income tax
bracket on the top chart, locate the taxable or tax-exempt return of interest in the
lower tables.
1Taxable income is gross income, less adjustments, exemptions and itemized deductions. 2016 federal
income tax rates are shown.
Tax-Exempt
Return
Taxable Return Required to Equal Tax-Exempt Return at
Various Top Tax Brackets
10% 15% 25% 28% 33% 35% 39.60%
3% 3.33% 3.53% 4.00% 4.17% 4.48% 4.62% 4.97%
4% 4.44% 4.71% 5.33% 5.56% 5.97% 6.15% 6.62%
5% 5.56% 5.88% 6.67% 6.94% 7.46% 7.69% 8.28%
6% 6.67% 7.06% 8.00% 8.33% 8.96% 9.23% 9.93%
7% 7.78% 8.24% 9.33% 9.72% 10.45% 10.77% 11.59%
8% 8.89% 9.41% 10.67% 11.11% 11.94% 12.31% 13.25%
9% 10.00% 10.59% 12.00% 12.50% 13.43% 13.85% 14.90%
10% 11.11% 11.76% 13.33% 13.89% 14.93% 15.38% 16.56%
11% 12.22% 12.94% 14.67% 15.28% 16.42% 16.92% 18.21%
12% 13.33% 14.12% 16.00% 16.67% 17.91% 18.46% 19.87%
Taxable
Return
Tax-Exempt Return Required to Equal a Taxable Return at
Various Top Tax Brackets
10% 15% 25% 28% 33% 35% 39.60%
3% 2.70% 2.55% 2.25% 2.16% 2.01% 1.95% 1.81%
4% 3.60% 3.40% 3.00% 2.88% 2.68% 2.60% 2.42%
5% 4.50% 4.25% 3.75% 3.60% 3.35% 3.25% 3.02%
6% 5.40% 5.10% 4.50% 4.32% 4.02% 3.90% 3.62%
7% 6.30% 5.95% 5.25% 5.04% 4.69% 4.55% 4.23%
8% 7.20% 6.80% 6.00% 5.76% 5.36% 5.20% 4.83%
9% 8.10% 7.65% 6.75% 6.48% 6.03% 5.85% 5.44%
10% 9.00% 8.50% 7.50% 7.20% 6.70% 6.50% 6.04%
11% 9.90% 9.35% 8.25% 7.92% 7.37% 7.15% 6.64%
12% 10.80% 10.20% 9.00% 8.64% 8.04% 7.80% 7.25%
Filing Status Taxable Income1 up to:
10.00% 15.00% 25.00% 28.00% 33.00% 35.00% 39.60%
Single $9,275 $37,650 $91,150 $190,150 $413,350 $415,050 $415,050+
Married Filing Jointly $18,550 $75,300 $151,900 $231,450 $413,350 $466,950 $466,950+
Married Filing
Separate $9,275 $37,650 $75,950 $115,725 $206,625 $233,475 $233,475+
Head of Household $13,250 $50,400 $130,150 $210,800 $413,350 $441,000 $441,000+
Estates and Trusts N/A $2,550 $5,950 $9,050 $12,400 N/A $12,400+
Page 74 Quick Reference Guide
Financial Destinations: Determining the Rates of
Return for Each Time Period
The client’s risk tolerance determines the rates of return for each bucket period.
The chart below provides suggested rates of return for each bucket: (Note: each
client is different and rates can be higher or lower than those shown below.)
Client Risk Tolerance
Ultra Con-servative Conservative Mod Cons Mod Mod Agg Aggressive
Traditional ROR: 3% 3% 4% 5% 6% 7%
Distribution 3% 2% 3% 3% 3% 3%
Bucket 1 3% 3% 3% 3% 3% 3%
Bucket 2 3% 4% 4% 4% 4% 5%
Bucket 3 3% 5% 5% 5% 5% 6%
Bucket 4 4% 5% 6% 6% 6% 7%
Bucket 5 5% 5% 6% 7% 7% 8%
Bucket 6 5% 5% 6% 7% 8% 9% Surplus - the same as the last bucket.
Model Allocations for each bucket are based on the rate of return chosen:
Distribution 20/80 40/60 60/40 80/20 95/5 Rate of Return: 0-3% >3% <5% >5% <7% >7% <8% >8% <9% 9+%
Cash: 95% 20.0% 10.0% 5.0% 5.0% 5.0%
Bonds: 5% 60.0% 50.0% 35.0% 15.0% 0.0%
Equities: 0% 20.0% 40.0% 60.0% 80.0% 95.0%
Page 75 Northeast Planning Associates, Inc.
Accumulating One Million Dollars
How long does it take to accumulate $1,000,000?
The answer depends on three things:
How many years are available to accumulate the fund,
The after-tax rate of return, and
The method of contribution: lump sum or monthly contributions.
The table below shows how long it takes to accumulate $1,000,000 under vary-
ing circumstances. The results shows are hypothetical.1 The actual growth will
depend on a number of factors.
Example: If you contribute $1,698 per month to an investment which returns
8.0% after-tax annually, you should accumulate $1,000,000 in 20 years. Like-
wise, if you currently have $202,971 invested at 8% after-tax for 20 years, it will
grow to $1,000,000 without additional contribution.
1The calculations shown assume monthly compounding. Monthly contribution amounts are calculated
on an end-of-month (ordinary-annuity) basis.
Annual Rate of Return (After Taxes)
Years
Annual Rate: 6.0% Annual Rate: 8.0% Annual Rate: 10.0% Annual Rate: 12.0%
Lump Sum Monthly Lump Sum Monthly Lump Sum Monthly Lump Sum Monthly
5 $741,372 $14,333 $671,210 $13,610 $607,789 $12,914 $550,450 $12,244
10 $549,633 $6,102 $450,523 $5,466 $369,407 $4,882 $302,995 $4,347
15 $407,482 $3,439 $302,396 $2,890 $224,521 $2,413 $166,783 $2,002
20 $302,096 $2,164 $202,971 $1,698 $136,462 $1,317 $91,806 $1,011
25 $223,966 $1,443 $136,237 $1,051 $82,940 $754 $50,534 $532
30 $166,042 $996 $91,443 $671 $50,410 $442 $27,817 $286
35 $123,099 $702 $61,378 $436 $30,639 $263 $15,312 $155
40 $91,262 $502 $41,197 $286 $18,622 $158 $8,428 $85
Page 76 Quick Reference Guide
Save Early vs. Save Late
The key to saving for an expected expense or season of life (i.e. retirement) is
starting early. The benefits of the concept of compound interest is well-
documented, with the main difference-maker being time.
Example: Bill starts saving $1,000/year when he gets his first job out of college
when he is 22. Bill continues to save for 10 years until he is 32, a total of
$10,000. At this time Bill’s twin brother Joe sees how well Bill has been saving
and figures he better start saving so he saves $1,000/year starting at his age 32
until he retires at his age 62, or 30 years, a total of $30,000. If an annual rate of
return of 8% is assumed on each brother’s investment, because Bill started earli-
er than Joe, Bill still ends up with more money at their age 62.
Page 77 Northeast Planning Associates, Inc.
Bond Maturity vs. Duration
Understanding the Difference
Maturity is the length of time until the principal of a bond is repaid. The short-
er the maturity of the bonds in a bond mutual fund, the less risk for the investor
because NAV is likely to fluctuate less in a shorter period of time. Maturity is
one measure of volatility.
Duration, on the other hand, considered the best benchmark for measuring the
volatility of fixed income securities, quantifies the price sensitivity of a bond as it
relates to a rise or fall in interest rates. It is a weighted average of the time it
takes to recover an investment . It is related to, but not dependent on, the
maturity of the bond. The shorter the maturity of the bond, the lower the du-
ration. In addition, the shorter the maturity of the bond, the more likely the
duration and maturity will be equal depending on the distribution of the bond
payments.
Illustrating Duration
Duration is traditionally expressed in years. However, some portfolio managers
use a percentage number, sometimes know as “modified duration” (instead of a
number expressed in years) as a kind of shorthand to describe and focus on the
interest rate sensitivity of a bond. The two numbers are approximately equiva-
lent, but the percentage number would always be slightly smaller than the dura-
tion number expressed in years. For example, a 10-year Treasury note has a
duration of roughly 6.8 years, which can be expressed as 6.5% (modified dura-
tion). In other words, if interest rates were to rise 100 basis points, the value of
this bond would be expected to decrease by roughly 6.5%. A 5-year Treasure
note has a duration of approximately 4.1%.
Page 78 Quick Reference Guide
The Rule of 72 and the Rule of 115
How Long Will It Take to Double or Triple Your Investment?
The rule of 72 helps in estimating how many years it takes
for an investment to double. Rule of 115 helps estimate
how long it takes for investment to triple.
ROR 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11%
Yrs to
Double
72 36 24 18 14.4 12 10.3 9 8 7.2 6.5
Yrs to
Triple
115 57.5 38.3 28.8 23 19.2 16.4 14.4 12.8 11.5 10.5
The Markets - 2015
Index Result Description
S & P 500 TR 1.38% Large cap stocks
DJIA 0.21% Large cap stocks
MSCI EAFE NR -0.81% Europe, Australasia
Russell 1000 Growth TR 5.67% Large cap growth stocks
Russell 1000 Value TR -3.83% Large cap value stocks
Russell 2000 Growth TR -1.38% Small cap growth stocks
Russell 2000 Value TR -7.47% Small cap value stocks
Barclays U.S Aggregate Bond 0.55% US Bond Index
DJ US Select REIT TR 4.48% N. American REITs
S & P Natural Resources TR -24.28% N. American Commodities
Page 79 Northeast Planning Associates, Inc.
Page 80 Quick Reference Guide
Page 81 Northeast Planning Associates, Inc.
NOTES
Page 82 Quick Reference Guide
Northeast Planning Associates, Inc.
43 Constitution Drive`
Bedford, NH 03110
Phone: 603-471-0900
Fax: 603-471-0471
www.npa-ae.com
Northeast Planning Associates, Inc.
Produced by:
The Planning Center
For questions or comments regarding content
please contact Andrew Doughty at extension 228.
Matt Eaton Marie Smith Andrew Doughty
Ext. 227 Ext. 301 Ext. 228
The Planning Center (TPC) at Northeast Planning Associates, Inc. is a group of
CFPs® and staff with over 65 years of combined experience that are here to
assist you with case consulting, technical questions, product support and full finan-
cial planning services. TPC exists to help make sure that, no matter how com-
plex, you never walk away from a case.