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Retirement

When am I not required to submit a social security number on my tax return?
A:

When filing your tax return, you are generally required to include the social security numbers of yourself and the individuals for whom you claim as dependents. However, exceptions do apply.

Exceptions
Child Born and Died Same Year
If you have a child who died in the year of birth, and you did not apply for the child’s social security number, an exception applies to including that child’s social security number. However, you are required to attach a copy of the child’s birth certificate to your tax return and print the word “‘died” in column (2) of line 6c of your 1040 Form or 1040A Form.

Non-resident Alien
If you are claiming for a dependent who is a non-resident alien that does not qualify to receive a social security number, you must use the individual’s individual taxpayer identification number (ITIN) instead.

Obtaining Identification Numbers
Social security numbers can be obtained in the US by completing an application at your local Social Security office, or at the U.S. consulate for individuals who live outside the US.

An ITIN may be obtained by filing IRS Form W-7 with the IRS, or by working with IRS-authorized Acceptance Agent, which are available in most states and some foreign countries.

If you are applying for an ITIN at the same time you are filing your tax return, you may need to send the application and the tax return to the following address, instead of sending the tax return to the usual address to which tax-returns are mailed.

Internal RevenueService
AustinServiceCenter
ITIN Operation
P.O. Box 149342
Austin, TX78714-9342

Or visit www.irs.gov for details.

If you changed your name due to marriage, divorce or other legal reasons such as a deed poll, you should contact the social security administration (SSA) to have the change reflected, so as to ensure that there is no discrepancy between the IRS and SSA records, as that could result in the processing of your return being delayed.

To read more frequently asked tax questions, How do I file taxes for income from foreign sources?,Does everyone have to file a federal tax return?, How can I make sure I’m ready to file my taxes? and Common Tax Questions Answered.


If you feel you will be unable to file your tax return by the tax deadline, see Get A Six-Month Tax Extension.

Question answered by Denise Appleby, CISP, CRC, CRPS, CRSP, APA

When are Simple IRA contributions due?
A:

According to the IRS, contributions to SIMPLE IRA plans that are taken from an employee’s pay check as a salary reduction are due within 30 days of the month in which the deferred payments were taken. For contributions taken from an employee’s pay in September, for instance, the contributions must be deposited into the SIMPLE plan by Oct. 30 of the same year. If the SIMPLE IRA is set up for someone who is self-employed and there are no employees, contributions that are reductions in pay must be deposited within 30 days of the end of the year – Jan. 30th. An employer may choose to make either matching contributions to an employee’s SIMPLE IRA, from 1% to 3% of his or her salary, or non-elective contributions of 2% of the employee’s salary no matter what the employee contributes. Contributions made on the part of the employer are due by the business’ filing due date for the tax year – usually April 15, or Oct. 15 if there is an extension. However, there are Department of Labor rules governing SIMPLE IRA plans that are different from IRS requirements. According to the DOL, an employer must make contributions that are taken from an employee’s salary to the IRA as soon as he or she can reasonably do so, but no later than 7 business days for businesses with fewer than 100 employees; this does not generally apply to owners with no employees or with only an employee who is a spouse. Contributions that are not made in a timely manner may incur fees or necessitate the filing of an amended tax return.

When are Simplified Employee Pension (SEP) IRA contributions due?
A:

A SEP IRA, also known as a simplified employee pension plan, is an investment vehicle that allows business owners to contribute up to 25% of an employee’s compensation or $52,000 a year, whichever is less, to their employees’ retirement savings plans. This contribution must be made by April 15. Business owners can also open a SEP IRA account to invest in their own retirement savings plan. The cash contributions are deposited into an employee’s individual retirement account, also known as an IRA account or an annuity.

Employer contributions must be deposited into all employee’s SEP IRA accounts by that year’s tax-filing deadline, which is typically April 15 of the following year. But if the employer has an extension, then the final SEP IRA contributions date is the extension deadline date, which is usually Oct. 15.

For example: John earns an average of $50,000 a year at XYZ Corporation. The company wants to contribute 15% of each employee’s compensation into their SEP IRA accounts in 2014. This means John will receive a $12,000 contribution to his SEP IRA for 2014. XYZ Corporation has until April 15, 2015, to make the contribution to the employee SEP IRA accounts. If XYZ has filed a tax-filing extension until Oct. 15, 2015, then all contributions must be made for employees by that date.

Please note that SEP IRA contributions can be made in cash only, not property. Also, contribution amount limits are subject to change annually, based on cost-of-living adjustments. Other than contribution limits, all other rules for a SEP IRA are the same as a traditional IRA. This includes investment, distribution, and rollover rules.

When should I take my Canadian Pension Plan distributions?
A:

The Canadian Pension Plan (CPP) is a retirement program from which contributing Canadians may receive payments at the age of 60 or upon a disability. The program, however, does not start immediately paying you upon retirement, disability or at the age of 60 because you must apply for payments. While deciding when to take CPP payments is a personal choice that you should make with a financial adviser, from a financial point of view it, may be wise to take these payments as early as possible.

Although you are not guaranteed to receive the maximum payments from the pension program, our example uses the maximum payment an individual can receive (as of 2005). Table 1 illustrates the maximum payments for the starting ages of 60, 65 and 70.

CPP1.jpg
Table 1

Table 1 shows that the older you are, the more money you receive each month and each year. However, this does not tell the whole story; we need to look at the total that would be withdrawn over time. Table 2 shows three situations: taking contributions starting from the age of 60, 65 and 70 until the age of 90. The values in the table are simply the growing total value of the payments – without the contributions being invested.

CPP.gif
Table 2

Table 2 shows that by taking CPP at the age of 60, you will have received a total of $215,822 by the age of 90. By taking it at 65 you will have a total of $258,570 and by taking it at 70, your total will be $271,488 by the age of 90. It is clear in the table that the later you take it the more you end up receiving in total if you were to live to 90.

However, the most interesting point the table shows us is how long it takes for those starting at the later ages (65 and 70) to catch up to the earliest date (60). If you were to take CPP at the age of 65 it would take you 11 years (when you are age 76) to catch up to the total value received by someone who had taken it at 60 years of age. If you started taking amounts at age 70, it would take 21 years (when you are 81) for you to catch up to someone who took payments at 60. This simple look at the CPP program does not take into consideration the investment of contributions but if the contributions were invested but it would take even longer for the 65 and 70 values to catch up to the value achieved by taking CPP at the age of 60.

The implications of what we show you here boils down to whether you want more now or more later. The higher monthly, annual and total payments received by those who start later may seem like a reason to hold off in taking your CPP payments. But, it takes many years to collect the same amount as someone who starts early, and there are no guarantees that you will live that long. If are not sure of what is best for you, it is wise to consult with your financial planner about taking the payments early.

When to apply for Social Security retirement benefits
A:

Applications for Social Security benefits can only be processed a maximum of four months before benefits are scheduled to begin. Thus, the earliest you can apply is age 61 and nine months, and you can expect to receive your first payment four months later – the month after your birthday. However, benefit payments come after each full month of eligibility.

For example, if you turn 62 on December 15, your first full month of eligibility is January and your payment for that month will arrive in February. If you have already reached age 62 and met all other eligibility criteria, you may begin collecting benefits in the same month you apply, though your first payment would still not arrive until the following month.

Note that receiving Social Security at age 62, the earliest age at which you can receive benefits, means that you will receive a reduced payment compared to waiting for full (aka normal) retirement age, or even longer (until age 70) to begin. For details, see What is the difference between early retirement and full retirement as it applies to Social Security retirement benefits?

The Process

Applying for Social Security benefits is a fairly simple process. Applications can be submitted either online, over the phone or in person at your local Social Security office. The most convenient way to apply is through the online platform found on the Social Security Administration (SSA) website. The application itself takes about 10 to 30 minutes and can be saved at any point for future completion. In addition, this application can also be used to apply for Medicare.

It is generally recommended you apply three months in advance of when you would like to start receiving the checks. In order to ensure a quick and easy application process, it is best to have all the necessary information on hand before beginning. This can include, but is not necessarily limited to, the birth and marriage dates of your and your spouse, your Social Security number, proof of citizenship, tax information, employment history, military records, health insurance information and bank account information for direct deposit.

Sometimes, there are requests for documents, including original birth certificates, marriage licenses and tax returns. An agent usually contacts you if any clarification or additional documentation is needed. An agent also lets you know if you are eligible to receive more money through another person’s account, such as a spouse and if anyone else is eligible to receive benefits under your account.

Once you have completed your application and supplied all requested information, you are supplied with a receipt for your records as well as a confirmation number you can use to check the status of your application online after submission. You can also follow up over the phone or in person at your local Social Security office. Depending on your situation and what documentation may be required, your application may be approved within the same month you apply.

In addition, benefit payment schedules are now dictated by date of birth. For those with birthdays between the 1st and 10th, payments will be made on the second Wednesday of every month. For those born between the 11th and 20th, payment is made on the third Wednesday. For those born between the 21st and 31st, payments are made on the fourth Wednesday.

This means that if you turn 62 on December 15th, your first payment will arrive on the third Wednesday of the following February. If your birthday is December 15th and you are already over age 62, your first payment should arrive on the third Wednesday of the month following the month in which you apply. (If you’re already on Social Security, or receive both Social Security an…

Which of the Following Accounts Does ERISA Cover?
A:

A. IRA

B. State employee pension plan

C. Corporate defined-benefit plan

D. Coverdell savings account

Answer: C

The correct answer is “C.” ERISA covers most employer retirement plans, but public employee plans are exempt from coverage. “A” is not correct because the IRA is an individual plan, not an employer plan, while the Coverdell savings account is a college savings account, not a retirement plan.

Who bears the investment risk in 401(k) plans?
A:

Who actually bears the investment risk in a pension plan depends on the type of pension plan that is employed. In a broad sense, there are two benefit formulas that will calculate the pension benefits the plan member will receive. In the case of a defined-contribution pension plan, the plan member (i.e. the employee) bears all of the investment risk.

The formula for calculating how much an employee under this type of plan will receive is simple, as it only calculates the amount that the plan member and the member’s employer will contribute to the pension plan. The amount of cash that is in the fund when the plan member retires is what that person will receive as a pension. There is no guarantee that the plan member will get anything from this defined-contribution plan, as the fund may lose all of its value in the equities markets.

The other type of pension plan is called a defined-benefit pension plan. In this type of plan, the contribution amounts are determined by how much the plan member desires, or is eligible to receive upon retirement and how long the worker has until retirement. Once these figures are known, the contributions that are required to achieve that ending total are determined. In this type of pension plan, the benefits are guaranteed by the employer and, therefore, the company must also bear the investment risk. This investing strategy is called a liability driven investment strategy, and is a key feature of any defined benefit pension plan.

Who is eligible for Canada Pension Plan benefits?
A:

Nearly all individuals who work inside of Canada are eligible to contribute toward and receive benefits from the Canada Pension Plan, or CPP. The CPP is a deferred income retirement vehicle that has been in place since 1965 when it was introduced as a complement to Old Age Security. Standard benefits are reserved for those who reach the full retirement age of 65, although there are provisions for people between the ages of 60 to 65, those with a chronic disability, and survivor benefits to those who lost someone before they reached retirement age.

CPP benefits are not sent to anyone, even those with eligibility, until an application to receive them is filled out and submitted. If an application is denied, an appeal can be made to the Canada Pension Appeals Board. Those living in Canada but residing in Quebec are not eligible for CPP benefits, since the provincial government of Quebec has opted out of the program. Instead, Quebec offers the Quebec Pension Plan.

Contributions towards the post-retirement benefits of the CPP are mandatory, even for self-employed workers. The level of benefits that you are eligible to receive in retirement varies depending on how much you paid into the system during your working life. Since the contribution rate, as a percentage of income, is fixed, those who earn more money are eligible to receive higher monthly benefits from the CPP. The CPP also provides monthly benefits to the dependent children of disabled or deceased CPP contributors. To qualify for children’s benefits, the child must either be under the age of 18 or under the age of 25 while enrolled full-time at a recognized educational institution.

Why are insurance companies and pension funds considered financial instruments?
A:

Insurance policies are widely considered to be financial instruments. Pension funds may contain many different types of financial instruments, although they are not always classified as such. Most tax regimes, including those in the United States, offer special treatment for the value of insurance instruments or pension funds.

One common definition of a financial instrument is a written, legally binding obligation by one party to conditionally transfer something of value, including money, to another party on a future date. All financial instruments should be able to serve as a store of value and a means of payment.

Most financial instruments are classified as debt or equity. Insurance reserves and pension fund investments possess elements of both debt and equity, so most regulatory agencies place them in a separate category. The International Monetary Fund (IMF), for instance, simply classifies them as “other.”

Treatment of Insurance Policies

Insurance, in its simplest form, is a written protection against uncertain risk for money. Even though basic insurance is not a security, it does promise the potential for financial transfer from one party to another.

There are other types of insurance contracts which develop cash value or provide other financial benefits. Some policies allow the holder to take out loans against the value of the policy. All of these are also financial instruments.

Treatment of Pension Funds

Pension funds are not like insurance policies; they are more analogous to insurance companies. The products offered by and contained within pension funds are financial instruments.

Pension funds exist outside of the U.S., but they are often called superannuation funds in Europe. Traditionally, pensions are vehicles of long-term risk capital allocation between issuers and retirement horizon investments. Low interest rate regimes across the globe threaten this relationship, as more households are assuming investment risks.

Why are IRA, Roth IRAs and 401(k) contributions limited?
A:

Contributions to IRA, Roth IRA, 401(k) and other retirement savings plans are limited by the IRS to prevent the very wealthy from benefiting more than the average worker.

Contributions to traditional IRA and 401(k) accounts are made with pretax dollars, so they can offer a significant reduction to a worker’s annual income tax burden. The contributions to many retirement savings accounts are capped to ensure that those who can afford to defer large amounts of their compensation do not take advantage of this tax benefit.

401(k) Contribution Limits

In 2017, the maximum employee contribution to a 401(k) plan, either traditional or Roth, is $18,000.Also, employers can contribute through either non-elective deferrals or contribution matching. However, the total contribution from all sources must not exceed the lesser of the employee’s compensation or $54,000 for 2017.

To encourage those nearing the end of their working years to contribute more, the IRS also allows additional catch-up contributions for employees over the age of 50. In 2017, the catch-up contribution is $6,000, for those over 50.

Non-Discrimination Testing

A 401(k) is a qualified retirement plan offered through an employer. The IRS imposes certain limitations on the contributions of highly compensated employees, called non-discrimination testing, to encourage equal participation across all compensation levels.

For the 401(k) plan to retain its qualified status, contributions made by employees who earn large salaries – more than $120,000 must not exceed a certain percentage of the average contribution made by non-highly paid employees. This prompts higher-level employees, such as executives and management, to encourage plan participation among the rank and file. As the average regular employee contribution increases, the amount that more highly compensated employees are allowed to contribute increases, up to the annual maximum.

IRA Contribution Limits

For the 2017 fiscal year, IRA participants are limited to a maximum contribution of $5,500, or 100% of their compensation, whichever is lesser. Those over 50 can make catch-up contributions of up to $1,000 annually.

Like 401(k) plans, the contribution limits for IRAs apply to all accounts held by the same person. If you have both a traditional IRA and a Roth IRA, the total of all your contributions to both accounts cannot exceed $5,500, or $6,500 if you are over 50.

Leveling the Playing Field

IRAs are not qualified retirement plans because they are not offered through an employer. There is no provision for the type of non-discrimination testing that applies to 401(k) contributions.

However, IRAs were developed to encourage the average worker to save for retirement and not as another tax shelter for the rich. To prevent unfair benefit to the wealthy, the amount of your contribution to a traditional IRA that is tax-deductible may be reduced if you or your spouse is covered by an employer-sponsored plan, or if your combined income is above a certain amount.

In addition, Roth IRAs are only available to those who meet certain income requirements. In 2017, the contribution limits for single persons who earn more than $118,000, and married couples filing jointly who earn more than $186,000, are reduced. Individuals who earn more than $133,000 and couples who earn more than $196,000 are not eligible to contribute to Roth IRAs.